What Is a Family Limited Partnership?
A family limited partnership (FLP) is a type of limited partnership. In a limited partnership, there is at least one limited partner and at least one general partner. Limited partners have no personal liability for debts of the partnership except up to the amount of money they contributed to the partnership. General partners are responsible for the partnership’s debts. Someone can be both a limited and general partner in the same partnership, as long as there are at least two people involved as partners.
Limited partners have no control over the FLP’s operations. They cannot buy or sell assets, and they cannot act on the FLP’s behalf. Limited partners also cannot sell their interests in the FLP, except to immediate family members such as a spouse, siblings, parents, or children.
How Is a Family Limited Partnership Structured?
In a FLP, members of a family are partners in the limited partnership, or they control entities such as limited liability companies (LLCs) that are the partners. Typically, one person (or an LLC that he or she controls) is a general partner, and that person’s children or heirs are the limited partners. A husband and wife also may be general partners together.
FLPs typically act as holding companies for a variety of assets, which could include a family business or real estate. Rather than family members owning the assets outright, the FLP owns them. This allows the general partner to effectively “move” assets to heirs while still retaining control over the assets. The heirs, who are limited partners, receive the benefit of these assets from distributions. But the general partner controls the assets, as well as the timing and amount of distributions.
Are There Tax Advantages from Forming an FLP?
Yes, the FLP structure may provide some tax benefits. People forming FLPs most often will give limited partner interests in the FLPs to their children as gifts. For example, a father could invest $100,000 in an FLP and give his son a 50 percent limited partner interest. The true fair market value (FMV) of the limited partner interest is not $50,000, as you might expect. Because the limited partner has no control over the partnership and his interest has little marketability, the FMV is substantially less. As a result, the IRS’s gift tax assessment of this gift will most likely be less than if the father gave his son $50,000 outright. The tax advantages do require careful assessment, however, so consult a professional to set up your FLP structure.
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