A Family Limited Partnership (“FLP”) is a unique business entity that has been used by families for many years and for a myriad of reasons. Although the FLP has many benefits, it is most often used by families to (a) shelter large assets from creditors; (b) provide a vehicle to gift assets to family members, while minimizing or eliminating Gift Tax; and (c) remove the asset from the taxable estate of the donor, therefore reducing or eliminating Federal Estate Tax.
The FLP is often created as a holding company for investments or other large assets owned by a family. It is often times used to remove the assets from elderly parents’ or Grandparents’ taxable estate and to gift limited partnership interests to younger generations.
For example, let’s use the hypothetical scenario of Grandparents who are 65 years old and have a taxable estate of $6,000,000, with a strip shopping center that is worth $4,000,000. The Grandparents create an FLP, making themselves the General Partners and Limited Partners, and make the children and grandchildren the Limited Partners. The Grandparents are each able to gift membership interests to the family members every year, utilizing the annual gift exclusion of $13,000 to each family member. If you have ten family members to gift to, and each grandparent gifts the maximum amount to each person, this is a total of $260,000 per year. Now let’s take into consideration that a Limited Partner has little say in the day to day business decisions and has no power to demand distributions of income or profit, relative to their Limited Partnership interest. Additionally, Limited Partners have no ability to sell their Limited Partnership interest. Given the fact that the Limited Partners have a minority interest in the partnership and have virtually no power, their interest is deemed to be unmarketable, therefore, the IRS allows for a discounted value of the Limited Partner’s interest. This can sometimes be as much as a 45% discount. Now if you consider the Grandparents can gift $260,000 to their family members each year, but take into consideration this is the amount prior to a 45% discount, they are able to remove a gross amount of $400,000 from their taxable estate each year, gift tax free. This should allow the Grandparents to gift a majority of the business to the family within approximately ten years, while still maintaining control of the business and the major decisions. In addition, they have now lowered their taxable estate to approximately $2,000,000.
Our attorneys will further explain the many benefits that an FLP offers and outline the advantages that your family will receive by utilizing this unique business vehicle.