A Family Limited Partnership (FLP) is a business entity that is used by many families with operating businesses. Sometimes an FLP is used because a family member wants to start a business but needs start-up capital. In this instance, the family member starting the business may sell shares to other family members to raise capital and the other family members will receive dividends when the business makes money. More frequently, however, the Family Limited Partnership is an estate planning tool used by families with operating businesses to transfer the business estate tax-free.
Family Limited Partnership Structure
As with other partnerships, the Family Limited Partnership can have general partners and limited partners. The general partners have a say in running the business and may be exposed to liability. The limited partners do not have control or liability. In most Family Limited Partnership, the general partners are compensated for their services.
Using a Family Limited Partnership as an Estate Planning Tool
When using a Family Limited Partnership in estate planning, the parents are typically the owners of both the general and limited partnership shares initially. The parents then enter into a gifting plan and gift limited partnership shares up to the annual gift tax exclusion to their children and sometimes their grandchildren. For 2022, this amount is $16,000.
Over the years, the partners can gift up to $16,000 each year to their children and grandchildren. These transfers are tax-free as long as they are below the annual exclusion. If you have three kids and nine grandkids, you could transfer $192,000 tax-free each year.
Since these assets leave the parent/family member’s estate, there are no estate taxes on the transferred shares when the parent dies. Future returns are also excluded from estate taxes, and the children and grandchildren benefit from profits, interest and dividends generated from the Family Limited Partnership.
The general partners can also stipulate through the partnership agreement protections for themselves; for instance, compensation for their services, as well as restrictions regarding transfers to third parties and the age beneficiaries must attain before the gifts can be transferred to them. The Family Limited Partnership can work in conjunction with a Uniform Transfers to Minors Act account to protect the gifts.
If you believe a Family Limited Partnership might benefit your family, contact Grissom Law, LLC for a consultation today.
Disclaimer
This Blog/Web Site is made available for educational purposes only as well as to give you general information and a general understanding of the law, not to provide legal advice. By using this blog site you understand that there is no attorney-client relationship between you and Grissom Law, LLC.