May 24, 2017
FAMILY LIMITED PARTNERSHIPS
THIS DOCUMENT IS FOR INFORMATIONAL PURPOSES ONLY. THIS DOCUMENT IS NOT TO BE CONSTRUED AS LEGAL ADVICE.
A Family Limited Partnership is simply a limited partnership in which all of the partners are family members. Like other limited partnerships, an FLP consists of two types of partners; general and limited. General partners control all management and investment decisions and bear 100% of the liability. Limited partners cannot participate in the management of the FLP and have limited liability.
- At least one general partner must be designated to accept personal liability and manage the affairs of the partners The general partner can be an individual or Husband and Wife, typically in the senior generation in a family; or a Texas LLC can be formed to be the general partner. Then, the remainder of the partnership interests are held by family members who are limited partners. The limited partners must agree to take no active role in the day-to-day management of the business of the partnership. By doing so, the limited partners will be protected from personal liability for the actions of the partnership.
- In an FLP, generally, the senior family members (parents or grandparents) contribute assets in exchange for a small general partner intere They can then give all or a portion of the limited partner interest to their children and grandchildren.
- Additionally, limited partnerships are pass-through entities for federal income tax purpose Meaning that the FLP itself isn’t taxable – instead, the owners of a partnership report the partnership’s income and deductions on their personal tax return, in proportion to their interests.
- After setting up the FLP, selected family assets are transferred into it. When the transfers are complete, family members, no longer own a direct interest in these asse Instead, they own a controlling interest in the FLP, and it is the FLP that owns the assets. The general partners have management over the affairs of the partnership and can buy or sell any assets they wish, subject to the terms of the partnership agreement. The general partners also may have the right to determine what portion of partnership income and assets are retained by the partnership and what amount is to be distributed to the partners.
17101 Preston Road, Suite 110, Dallas, Texas 75248
Telephone: 469-398-2780 Facsimile: 469-398-2777
BENEFITS OF AN FLP
- Centralized Management of Family Assets
An FLP allows the general partner to control the partnership and its assets, while at the same time allowing transfer of ownership of portions of the assets to family members who are limited partners. This works particularly well for real estate, rather than multiple transfers of specific real estate assets, the GP can transfer a specified percentage of a collection of real estate assets to each limited partner.
- Estate and Gift Tax Benefits
Transferring limited partnership interests to family members reduces the taxable estate of senior family members. The senior family members transfer the value of the asset to their children, removing it from their estate for federal estate tax purposes, while retaining control over the decisions and distributions of the investment.
Transfers of limited partnership interests are also eligible for the annual gift tax exclusion and the value of limited partnership shares can be discounted when transferred to family members.
- FLP Discounts
For gift and estate tax purposes, assets are valued at their fair market value – what a willing buyer would pay a willing seller for those assets. FLPs typically have restrictions on their transferability. For example, transfers to non-family members may be prohibited unless other family members agree. Also, there may be fewer people interested in buying limited partnership interests than there would be for the underlying assets. These factors – restrictions on transferability and lack of marketability – can make the price a willing buyer would pay for an FLP interest less than what the same type buyer would pay for the underlying assets. This difference – the discount – can reduce the amount of gift and estate tax payable.
- Simplification of Probate
The assets held by a family limited partnership are not part of an individual’s estate; rather the partnership interest is part of the estate. Therefore, a lengthy probate inventory can be avoided. Only the partnership interest is declared during the probate process, keeping the assets help by the FLP confidential.
- Sale of Real Estate Post-Death
When an estate is selling real property, title companies require an Estate Tax Closing Letter before the title company will insure a clear title to a buyer purchasing property from a decedent’s estate. This often means that property cannot be sold out of a decedent’s estate for a considerable period of time following the date of death, until the probate process is
complete. On the other hand, if real property is held in an FLP that does not dissolve upon the decedent’s death, there is no requirement for a closing letter and the property should be available for immediate sale.
- Creditor Protection
Assets within the FLP cannot be legally seized by a judgment creditor of a partner. Instead, the law provides that the creditor’s remedy is limited to a charging order – a right only to partnership distributions to the debtor, when, if ever, such distributions are made. Moreover, creditors may not force cash distributions, vote, or own the interest of a limited partner without the consent of the general partners. As a result, the limited partnership interests of family members are much less attractive to any judgment creditors. The partnership structure also provides asset protection to family members in the event of a divorce or in the event of their own financial irresponsibility.
Families with business assets which they wish to own in common – including assets which some family members wish to pass on to other family members- may benefit from an FLP. The FLP permits the family to have flexibility in dividing ownership and control in ways which work for its members. The use of an FLP should be considered for the potential benefits of providing administrative convenience, potential income tax, estate tax and gift tax reductions, as well as asset protection.
If you have any questions, please feel free to contact us at the number listed above.