In order to discuss a Family Limited Partnership it is first necessary to define a Limited Partnership

A Limited Partnership is a partnership having at least one Limited Partner, whose liability for the enterprise is limited to his or her investment, and at least one General Partner, with unlimited personal liability for the entity. The general partner manages the partnership’s business and has personal liability for the partnership’s activities. Limited partners have limited liability without any authority to manage the partnership’s business activities. In simpler terms, a limited partner is a passive investor whose rights are similar to those of a shareholder in a corporation. For example, if a corporation goes bankrupt, its shareholders only lose the current value of their stock. Likewise, a limited partner would not ordinarily have personal liability for partnership obligations; whereas the general partner would ordinarily have personal liability for the partnership obligations.

A Family Limited Partnership (FLP) is a limited partnership in which family members or family controlled entities own a majority or all of the limited partnership interests.These family members usually include a parent or parents, one or more children, and often include trusts created for children or descendants of children. The phrase “Family Limited Partnership” or “FLP” cannot be found in any statute on business entities. It is merely a term of art; an FLP is a limited partnership sanctioned under state law and is treated as a legal person. It is typically structured to give maximum authority to the general partner and minimal legal rights to the limited partners. Most FLPs are structured so that the general partner owns a small fractional percentage of the partnership interest with ownership of the remaining interests held by the limited partners. Furthermore, to protect the general partner’s interest, it is usually owned by a Limited Liability Company or Corporation to shield the limited partner from personal liability.

The most important thing you can do after setting up your FLP is to operate it correctly. You should review this manual at least annually and whenever you have questions. If it does not contain the answer to your questions, please contact us for guidance. We will either have the answers or we will help you find the answers from one of your other advisors.

Benefits of Creating a Family Limited Partnership

There are many reasons to create an FLP. Here are some common reasons.
(a) Provide Asset Protection and Protect Against Future Creditors of Partners -
Limited partnerships provide considerable asset protection to partners carrying on a business. The FLP limits the personal liability of limited partners to the partnership’s creditors as pointed out above since limited partners risk only their investment to the creditors of the partnership. An FLP also provides some protection from the judgment creditors of the individual limited partners if a judgment is entered against the partner after the creation of the partnership.

(b) Facilitate Annual Gifting
One of the primary benefits of the FLP is its ability to maximize annual tax-free gifts to family members and to get assets out of the client’s gross estate for estate tax purposes. Currently, each person may transfer $13,000 gift tax-free per person each year or $26,000 gift tax-free per person each year for married couples. Currently, each person may transfer $13,000 gift tax-free per person each year or $26,000 gift tax-free per person each year for married couples. This annual exclusion can be maximized by claiming discounts on the value of the limited partnership interest gifted due to a minority interest and/or lack of marketability discounts at the time of gifting. The discounts are permitted due to the lack of control and restrictions of transfer usually associated with limited partnership interests in the Family Limited Partnership.

For example, if a minority interest and/or lack of marketability discount conducted by a competent appraiser is equal to 50% of the transferred limited partner interest, a married couple can gift $52,000 to each child while only utilizing the annual exclusion of $26,000. Meaning $52,000 may be gifted to each child or other person without any tax consequences as opposed to $26,000.

(c) Estate Tax Benefits
A Family Limited Partnership can be used as an Estate Planning Tool to significantly reduce or eliminate estate taxes. The same discounts used to reduce the value of gifts made during life also apply to reduce the estate tax value of transfers of FLP interests at death. The estate tax savings for claiming lack of marketability and minority interest discounts can be substantial. The FLP is able to shift the value of assets out of the gross estate without any loss of control.

Under current federal estate tax law, estates greater than $3,500,000 are taxed at a flat rate of 45%. In 2010, the estate tax is repealed, but only for one year. Unless Congress changes the law, in 2011 and thereafter estates over $1,000,000 will be taxed at rates from 41% to 55% depending on the value of the estate. State death tax laws may differ.

The example discussed in section (b) above may also apply to the remaining limited partnership interests of any deceased member.

(d) Probate Avoidance and Maintain Privacy
Partnerships assist in preventing family assets from going through probate upon the disability or death of any family member. If a partner becomes incapacitated or dies, owning partnership interests can simplify any legal proceedings because the partnership’s assets are not subject to the conservatorship, guardianship, or probate court – only the incapacitated or deceased partner’s individual interests are. For privacy reasons, it is in the best interest of the partnership and the partners to simplify such proceedings.

(e) Retaining Control
A typical Family Limited Partnership is established by an older family member, a parent, who transfers business or investment assets to the partnership and the older family member often serves as a general partner. The general partner has control over the business activities of the partnership, making investment and management decisions and choosing when distributions should be made to the limited partners. This determination centers upon the general partner's evaluation of the needs of the partnership operations.

(f) Centralized Management of Investments
The FLP can hold investment assets and allow for centralized management. An older generation of family members such as parents or grandparents that create an FLP may retain fiduciary control of the enterprise and even introduce descendants to the management process over a period of time. Business succession planning encourages the older generation to train descendants or appoint others to manage family wealth and monitor decisions. It is important to understand the interplay between retaining control and making certain that anyone acting as a general partner, whether directly or indirectly through a management trust or entity, acts as a fiduciary. Recent court rulings and IRS interest clearly shows that failure to do so can result in potentially adverse tax consequences.

Pooling of assets often reduces management costs and may also achieve better rates of return. It is easier to manage one portfolio than several scattered portfolios. Furthermore, the use of the FLP as a holding company may result in lower asset management fees and easier diversification of assets.

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