Limited Partnerships have become popular in the last decade due to the real estate bubble that started to grip most parts of the country in the 1970s. An extension of this limited partnership is the Family Limited Partnership ( FLP).
What is a Family Limited Partnership or FLP?
A Family Limited Partnership is a type of limited partnership formed to hold the family business or investments with the idea that the parents will make gifts of their limited partnership interests to their children. The main characters in an FLP are: a family, a family property and a C-Corporation or other appropriate business entity.
The potential benefits that can be derived from the Family Limited Partnership have pushed this entity from obscurity into being one of the preeminent vehicles for asset protection and estate planning. One of the benefits of forming an FLP is it enables you to spread the tax and risk among your family members. It is also designed to allow you to maintain full control of your family’s investments and assets while reducing the value of your estate for estate tax purposes.
Setting up an FLP
An FLP is formed in the state you live in and also in the state where the property is located. It is a separate legal entity with its own tax identification number. Any income or loss flows through to the partners and is reported on their tax returns. The key provisions for accomplishing tax savings and asset protection are set forth in an FLP agreement based upon your particular circumstances and objectives. Family savings, investments and titles to businesses and real estate interests are transferred into the FLP. If properly structured, these assets are protected from potential claims and lawsuits. In the beginning, the parents own both general partner and limited partner shares. Over time, limited partner shares are gifted to the children by the parents using their respective annual $13,000 gift exclusion. How much of the shares will be issued to each child? That is a typical decision every family must make according to their specific circumstances.
Generally, the spouse with the highest risk should not act as a general partner. The spouse with a relatively low risk will be the general partner operating and managing the FLP. This spouse will have a relatively low share to protect from any potential frivolous liability. Members can also own some percentage as general partners and some percentage as limited partners.
Example: A family of four, with 2 children, and both spouses earning close to $100,000 with some family property holdings. The shares in FLP for this family might look like this – Husband ( assumed to be high risk ) 49 % limited partner, Wife (assumed to be low risk) 2% general partner, Wife’s limited partnership shares 47% , each child can own 1% each as limited partners.
Each year, the spouses can gift a specified percentage to each child (subject to gift tax limitation), thereby diluting their shares gradually in favor of the children. This effectively spreads the income among the family members. The greater the value, income generated by the property and number of family members, the higher the spread or distribution of risk and tax.
Please feel free to contact The Tax Club if you would like to schedule a free consultation on how a Family Limited Partnership may be effective for you. 866-840-1829 x5438
Tags: Family Limited Partnership, Limited partnerships, the tax club
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Excellent..
Good information. It also should be noted however that general partners are subject to self employment tax if there is non-passive income in the FLP while limited partners are not subject to the self employment tax. Additionally, the social security portion of the self employment tax (12.4% out of total 15.3%) does not apply to income over $106,800. This should also be a driving factor in deciding who should be a general partner and who should be limited.
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i hae always wondered about FLPs. very informative.