Family Limited Partnerships Can Reduce Estate Taxes And Pass On A Business
A family limited partnership is a good idea for passing on a family-owned business or real estate holdings. Business succession planning is one of the most important and difficult aspects of leaving an estate to a younger generation. Carrying on the business to future generations is emotional, but estate planning, financial considerations and legal structure of the business must all be taken into account as well. Having a fully realized succession plan can minimize financial strain on the business and avoid later contention. With a family limited partnership, the succession of a business can be much smoother, as it turns the business into a holding company that allows for a gradual shift of ownership over time.
In an FLP the older generation are generally the company’s general partners. The limited partners are the younger generation who initially don’t have much control over the company’s daily operations or business assets. While the business operates as a usual partnership, it allows the general partner to reduce interest in the company to the limited partners without giving up control or assets of the business. Like other limited partnerships, an FLP provides pass through taxation, meaning the business itself is not taxed on its income.
In addition to the gifting possibilities of an FLP, it enjoys discounts against the FLP’s assets. The law allows this because compared to a gift from a C-corp, for example, there is less marketability of the business assets and there are restrictions on what the transferee limited partner can do with gifted assets. A valuation of the FLP’s assets transferred is required when applying the valuation discounts.
Another benefit to an FLP is some protection from creditors or legal claims. If a limited partner has outstanding debt, the general partner does not have to distribute assets from the FLP, leaving nothing for creditors to go after. Also, as with other limited partnerships, claims against a limited partner are subject to that partner’s interest in the business, not underlying FLP assets. An FLP can also provide protection against marital claims if the limited property interests are restricted to family members. An FLP can require a transfer back to the family in the event of divorce for fair market value.
The IRS looks closely at the restrictions on gifts in an FLP and their valuation. In addition, it is not clear that these discount valuations will be available forever. Congress has looked at changing federal law on FLP discount valuations, so the advice of an experienced attorney is necessary to ensure compliance