Family Limited Partnerships (FLPs)
A family limited partnership (FLP) is a legal arrangement in which a family business or asset is placed into a partnership and owned by multiple family members. The partnership is typically established by a parent or senior family member, who transfers ownership of the business or asset to the partnership in exchange for an ownership interest in the partnership, known as a “unit.”
The FLP allows family members to share ownership of the business or asset, while also providing a way to transfer ownership to future generations through the sale or gift of units. This can be a useful estate planning tool, as it can allow the transfer of ownership to occur at a lower valuation due to discounts applied to the units for lack of control and marketability.
In addition to providing a way to transfer ownership to future generations, an FLP can also offer some protection against creditors. Since the partnership owns the assets, rather than individual family members, the assets are typically not subject to the personal debts or lawsuits of any one individual.
However, it’s important to note that FLPs are not a foolproof way to protect assets from creditors. The Internal Revenue Service (IRS) and courts have scrutinized FLPs for potential abuse, such as using them as a way to avoid paying taxes or transferring assets to avoid creditors. As such, it’s important to work with the experienced attorneys at Hunter Sargent, PLLC when establishing an FLP to ensure that it is set up properly and in compliance with all applicable laws and regulations.
Setting up a Family Limited Partnership
Establishing an FLP typically involves several steps, including the following:
- Choose the assets to be placed in the FLP: The first step in establishing an FLP is deciding which assets to place into the partnership. This could include a family business, real estate, investments, or other assets. It’s important to carefully consider which assets are best suited for the FLP, as the assets placed into the partnership will be subject to the terms of the partnership agreement.
- Draft the partnership agreement: The partnership agreement is a legally binding document that outlines the terms of the FLP, including the rights and responsibilities of the partners, the management of the partnership, and the distribution of profits and losses. It’s important to work with an experienced attorney to ensure that the partnership agreement is properly drafted and in compliance with all applicable laws and regulations.
- Transfer ownership of the assets to the FLP: Once the partnership agreement has been drafted, the next step is to transfer ownership of the assets to the FLP. This typically involves executing a deed or other legal document to transfer the assets from the individual owner(s) to the partnership.
- Issue units to the partners: After the assets have been transferred to the FLP, the partners will typically be issued units in the partnership in exchange for their ownership interest. The number of units issued to each partner will depend on the terms of the partnership agreement and the value of the assets being transferred to the FLP.
- Register the FLP with the state: Once the FLP has been established and the units have been issued to the partners, it’s important to register the FLP with the state in which it will be operating. This typically involves filing the partnership agreement and other required documents with the state’s Secretary of State or similar agency.
Benefits of a Family Limited Partnership
- Estate planning: One of the main benefits of an FLP is the ability to transfer ownership of a business or asset to future generations. By transferring ownership to the FLP and then selling or gifting units to family members, the transfer of ownership can occur at a lower valuation due to discounts applied to the units for lack of control and marketability. This can be a useful estate planning tool, as it can allow families to pass on ownership of a business or asset to future generations while minimizing the impact on the family’s overall wealth.
- Asset protection: An FLP can also offer some protection against creditors. Since the partnership owns the assets, rather than individual family members, the assets are typically not subject to the personal debts or lawsuits of any one individual. This can be particularly useful for families with significant assets that may be at risk of being seized by creditors.
- Tax benefits: An FLP can also provide some tax benefits. For example, if the FLP is set up as a limited partnership, the general partner (usually the parent or senior family member who established the FLP) can receive a salary for managing the partnership. This salary is deductible as a business expense, which can reduce the overall tax burden of the partnership. Additionally, the sale or gifting of units to family members may be eligible for gift tax exclusions, which can further reduce the overall tax burden of the FLP.
- Business continuity: For family businesses, an FLP can provide a way to ensure the continuity of the business in the event of the death or incapacitation of a key family member. By transferring ownership of the business to the FLP and issuing units to multiple family members, the business can continue to operate even if one or more family members are no longer able to participate.
