California Probate - Law Offices of Janet Brewer Blog

What Is a Family Limited Partnership in California?

When you want to keep your business or other assets in the family, a family limited partnership can act as an estate planning tool to help you accomplish your goal.

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.

Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.

Using Family Limited Partnerships for California Estate Planning

When considering your estate planning options, you may be interested in using a family limited partnership if you want to keep wealth in the family. After you learn a little more about the FLP in California, talk to your estate planning lawyer about the benefits of setting one up.

What Is a Family Limited Partnership?

A family limited partnership (FLP) is a type of limited partnership, which is a business ownership structure. In a limited partnership, there is at least one general partner who assumes personal liability for any debts of the partnership. Also, there is at least one limited partner whose liability is limited to the amount of his or her investment in the partnership.

Typically, a husband, wife, and/or specially set up LLC are general partners in a family limited partnership. The husband or wife have a small general partner share of the FLP. The limited partners usually include the husband, wife, and other relatives (people can be both general and limited partners). The husband and wife may own a majority interest in the FLP as limited partners. The husband and wife contribute assets to the FLP in exchange for their partnership interests.

If the family chooses an LLC as the general partner, then the husband and wife are usually members of the LLC. As a result, they control the FLP through their membership in the LLC. But they are protected from creditors accessing their personal assets to fulfill FLP debts.

How Are FLPs Useful for Estate Planning in California?

Partners in a family limited partnership can gradually pass their partnership interests on to children or grandchildren. The partnership interests can also move to a living trust, irrevocable trust, or some other estate planning structure. They can transfer the partnership interests directly or they can make gradual gifts.

In this way, the original FLP partners can ensure that assets stay in the family for generations while the family maintains liability protection. California extended families may want to use FLPs for family businesses, assets currently owned by multiple family members, and more.

Planning your estate and interested in using an FLP? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.

Family Limited Partnership May Be the Answer

Lowering tax burdens and protecting financial wealth of future generations may be accomplished through a family limited partnership.

Proper estate planning can take advantage of gift tax exemptions and control gifted assets as explained in an example by New Jersey 101.5 in "Benefits of a limited family partnership."

One of the reasons people seek estate planning advice is to lower potential estate tax burdens yet not limit the ability to manage assets and in a family limited partnership the general partner owns a 1% share of the partnership and the other 99% is given to other family members. The general partner, however, has full control over the management of the partnership and its assets. 

Because ownership is limited to family members assets transferred through a family limited partnership receive a discount for gift tax purposes. Essentially the gift tax exemption can be stretched further than if assets are given away directly.

The family limited partnership can be used to give family members extra income now or to allow wealth to grow for later use.

An estate planning attorney can guide you through a family limited partnership.

Reference: New Jersey 101.5 (May 18, 2016) "Benefits of a limited family partnership."

Will a Family Limited Partnership Protect Your Assets?

I have written before about a few ways someone in the Bay Area can protect his or her assets from creditors. I want to expand here a bit on the idea of a family limited partnership (FLP), and how this might be a beneficial estate management arrangement for you.

How a FLP Works

A family limited partnership functions much like a holding company, with general and limited partners who have an interest in the partnership. This allows family members to pool resources and assets into a single entity that is easier and less costly to manage.

For the sake of illustration, let's create a very simple two-person partnership: A mother, the general partner; and her daughter, the limited partner.

Suppose in this example that mother and daughter have an equal 50-50 interest in the partnership (usually that would not be the case – in most cases mother would be the “general partner” with a 1% interest and daughter would be the “limited partner” with a 99% interest). Because daugther is only a limited parter, she lacks any control over the assets or their marketability - only the general partner may acquire or sell assets in the partnership.

This offers two very useful forms of protection.

Protection From Creditors

Suppose in our case that the daughter, the limited partner, has outstanding debts. Her creditors could theoretically obtain a “charging order” (a court order to pay over any distributions) for part of her interest in the partnership. However, the creditors could only receive distributions from this interest when the general partner distributed anything. The daughter has no control over distribution.

Therefore, should her mother, the general partner, simply never distribute anything, her daughter's creditors could simply be left with a taxable income yet no cash distributions.

Protection From Some Taxes

Now, suppose the mother would like to contribute $200,000 cash to the partnership.  After she has made the contribution, she gifts half of the contribution to her daughter’s share.   If mother had given her daughter $100,000 directly, the fair market value of the gift would be $100,000 and it would be fully subject to gift taxes. 

But mother didn’t give her daughter $100,000 – instead, she gave daughter a gift through the limited partnership, and there are restrictions on daughter’s ability to use that $100,000.  Because of those restrictions that $100,000 gift is worth something less than it would have been if the mother had simply handed her daughter $100,000 in cash. As a general rule, the more restrictions there are on a gift, the less it is worth.

The fact that the limited partner has no control over the assets means her claim to that $100,000 might not be so valuable to anyone else. Once that lack of control is factored in to the valuation, fair market value for that gift in the partnership might only be $95,000. Therefore, the gift tax would be based on the $95,000 value.

While this exchange is perfectly legal, it needs to be noted that only a qualified appraiser can evaluate the fair market value of the limited partner's interest.  It is also useful to note that gifts of cash within a limited partnership are usually appraised at “almost” the same value as the cash itself but that gifts of other types of property (such as land) are sometimes discounted by 15% to 40%.

If you require such arrangements to protect the your assets, you require experienced legal counsel to help you do it correctly.  Put our expertise to work for you, and protect the assets that you have worked so hard to build!  Contact us at (650) 325-8276 to explore your situation and execute the strategy you need.

Asset Protection: 7 Ways to Protect Your Assets From Creditors

When planning your estate, your primary objective is probably to pass on as much wealth to your heirs as possible. And if you’re like most people, you want to reduce or eliminate estate taxes as well.

But litigation, divorce, malpractice and other potential claims may damage your net worth more than taxes. So protecting assets from potential claims has become an additional planning objective. Fortunately, many of the same techniques you can use to reduce estate taxes also can provide creditor protection.

You can use many techniques to reduce your estate for tax purposes while also protecting your assets from creditors. Yet these measures won’t protect against existing creditors if a transfer constitutes a “fraudulent conveyance” under the Uniform Fraudulent Transfer Act. A fraudulent conveyance occurs if you had actual intent to hinder, delay or defraud a creditor when you made the transfer.

Here are seven ways to safely protect transferred assets from creditors:

1. Outright gifts. An outright gift protects a transferred asset from creditors. But you’ll lose all economic interest in and control over the asset

2. Family limited partnerships (FLPs). An FLP is an excellent asset-protection device because it limits a limited partner’s creditor’s ability to attach partnership assets to satisfy a debt. Creditors generally can obtain a charging order only against a limited partner’s interest in a partnership. A charging order would permit a creditor to receive distributions only when they’re made from the partnership, and the general partner could choose not to make distributions. The creditor could even end up with taxable income without any cash distributions.

3. Irrevocable life insurance trusts (ILITs). From the standpoint of protecting your assets, an ILIT removes insurance proceeds from your estate for federal estate tax purposes. And the trust protects from creditors the cash value of the policies during your lifetime and the policy proceeds when you die.

4. Qualified personal residence trusts (QPRTs). A QPRT lets you transfer a primary or vacation residence to a trust while you reserve the right to live in the home for a term of years. The value of the interest you retain (that is, the right to live in the house for a term of years) is calculated using IRS tables. The value of the property transferred into trust, minus your term interest’s value, is a gift known as the “remainder interest.” This gift can be sheltered from gift tax by your $1 million gift tax exemption. If you survive the term of years, the trust is not included in your estate for federal estate tax purposes. (QPRTs provide creditor protection by insulating the residence from your creditors’ claims. In a creditor protection situation, the nondebtor spouse should create the QPRT and retain the term interest.)

5. Inter vivos qualified terminable interest property (QTIP) trusts. You create this trust during your lifetime for your spouse. It qualifies for the gift tax marital deduction. The federal estate tax benefit to this technique is that when your spouse dies, the QTIP trust is included in his or her estate for federal estate tax purposes. If your spouse lacks sufficient assets in his or her own name to use his or her federal estate tax exemption, the QTIP assets will achieve this.

If you survive your spouse, an amount of assets equal to the estate tax exemption (currently $1.5 million) will first go to fund a family trust created under the QTIP trust for your benefit. The balance of the QTIP trust assets will be allocated to the marital trust for your benefit and will qualify for the marital deduction, resulting in no federal estate tax at your spouse’s death.

By structuring the QTIP trust this way, the assets allocated to the family trust when your spouse dies will escape estate tax. That is, the assets allocated to the family trust don’t qualify for the estate tax marital deduction, but your spouse’s estate tax exemption “shelters” them from estate tax. They also won’t be subject to federal estate tax when you die, because assets allocated to a family trust — including their appreciation — for a surviving spouse’s benefit aren’t part of the surviving spouse’s estate for federal estate tax purposes.

The inter vivos QTIP trust is extremely popular as a creditor protection device because the QTIP assets are completely insulated from claims of your creditors and your spouse’s creditors during your spouse’s lifetime.

6. Charitable remainder trusts (CRTs). A CRT usually provides for distribution of a percentage of the trust principal, at least annually, to a person, usually the grantor, for his or her lifetime. The CRT can provide that when the grantor dies, the grantor’s spouse shall become the CRT annuitant for his or her lifetime. When this period ends, the charity receives the remaining CRT assets (the “remainder interest”).

Creating a CRT provides several income tax benefits. For example, the grantor can deduct the remainder interest’s value (the interest passing to the charity) as determined at the CRT’s inception by consulting IRS tables.

An additional benefit is that the CRT is exempt from all income tax. So a grantor owning assets subject to a large capital gain can transfer these assets to the trust, and it can sell them without the grantor or the trust having to pay any tax on the gain. Or a grantor holding highly appreciated assets that aren’t producing much income can contribute them to the CRT and create an income stream and owe tax only as annuity payments are received. It sells them and reinvests the proceeds to service the annuity.

A nondebtor-spouse-created CRT protects assets from a debtor spouse’s creditors. A creditor can’t attach the principal because of the charitable interest. And a debtor spouse’s creditors can’t attach the nondebtor spouse’s annuity payments. If the nondebtor spouse dies first — and the CRT provides that the debtor spouse becomes the annuitant — the debtor spouse’s creditors could attach the annuity when distributed to him or her.

7. Grantor retained annuity trusts (GRATs). A GRAT is a gift of a remainder interest in an irrevocable trust, under which the grantor has retained an annuity interest for a term of years. For example, if $500,000 is transferred to a GRAT and the grantor has retained a 6% annuity, $30,000 per year will be distributed to the grantor. The remainder interest in the GRAT can be a trust for the grantor’s spouse, with trusts being created for children when both spouses die.

The value of the gift to a GRAT for gift tax purposes is the value of the property transferred to it, less the value of the grantor’s retained annuity interest. The value of the annuity is calculated according to IRS tables.

If the grantor survives the GRAT’s term, its assets will be excluded from the grantor’s estate for federal estate tax purposes. If the grantor dies during the term, some of the assets will be included in the grantor’s estate for federal estate-tax purposes.

If a nondebtor spouse is the grantor of a GRAT, the debtor spouse’s creditors can’t attach the annuity distributions to the nondebtor spouse. These creditors also can’t attach the GRAT principal. If a debtor spouse becomes a GRAT beneficiary when the nondebtor spouse dies, his or her creditors could attach any distributions to the debtor spouse.

Many options

These are just a few of the ways proper estate planning can also safeguard your assets from creditors. And in a society rife with litigation, you simply can’t underestimate the importance of protecting yourself. Learn all you can about these measures and others that may benefit you.