The Family Limited Partnership

A Family Limited Partnership is a unique entity that provides ultimate control and management of partnership assets. At the same time it provides asset protection benefits. Family limited partnerships have been used by families in agricultural areas for decades as a means of getting their children involved in running the ranch or the family farm. Only recently have they become a popular planning tool for any family run business, and offer many attractive estate planning advantages over most other business forms. A Family Limited Partnership (FLP) is structured in the same manner as any limited partnership, except for one distinct characteristic: only family members may participate. As in regular limited partnerships, there are one or more general partners who are vested with the management control of the partnership affairs and assets. The limited partners, which can be one or more individuals, neither have any control or management in the partnerships affairs, or in the management of assets, nor do they share in the partnerships liabilities-their role is passive.

To establish a family limited partnership one must follow the requirements of the state’s limited partnership act, which will probably require publication of the names of the general partner and the limited partners.

A family limited partnership can offer a number of advantages. Initially, the parents are both the general and limited partners. Each year, they can gift a small portion, (using the $10,00 annual gift tax exclusion) to their children, who are the limited partners. The parents, as general partners, continue to manage the property while their children, the limited partners, remain on the management sidelines. This transfer of “shares” shifts ownership to the children, and has no estate or gift tax liability.

Even thought the shares of the FLP are transferred to the children, the parents, as general partners still retain management control over the assets, and have the power to buy and sell assets and decide when and if they will make income distributions to the limited partners. Another advantage of the FLP, is that shifting income to the children, who are in a lower income tax bracket, will save taxes. Finally, the limited partnership shares are subject to a "discount" in value of their underlying assets, because there is no market for these shares and they can’t be sold to others. This discounting appraisal feature is advantageous for tax purposes, because the general partners can gift a higher amount of “shares” to their children, the limited partners, and it can still qualify as gift tax-free and estate-tax property.

Under unusual circumstances, such In the event that the general partners die or file for bankruptcy, most limited partnership agreements give the limited partners the right to elect a new general partner. A limited partner cannot take assets from the partnership or otherwise force the liquidation of the partnership before its term is up.

The major costs associated with FLP’s are the attorney’s fees incurred to set up the partnership. They can usually run between $2,000 and $7,000 depending on the nature of the business assets. Appraisal fees to establish both the underlying value and the appropriate discounts, can cost between $5,000 to $15,000. There will also be annual accounting fees for preparation of the partnership returns. The state may also charge an annual fee for the right to do business as a limited partnership in the state.

However, due to the costs of establishing FLP’s and the appraisal costs associated with making multiple transfers of the limited partnership interests they usually are not recommended unless the parents owning the business have a net wealth in excess of two or three million dollars. Most state laws restrict the sale of most limited partnership shares.In addition, the transfer of limited partnership shares may be further restricted by the partnership agreement. Even though family limited partnerships offer many benefits, they also have some disadvantages. It is important to thoroughly discuss these issues with a business attorney who is familiar with this entity in order to determine whether a family limited partnership is appropriate as an estate planning vehicle.