Family Limited Partnership

Definition

A Family Limited Partnership (FLP) is a type of limited partnership that consists of family members as partners. It is often used as a tool for estate planning and asset protection. The primary purpose of an FLP is to manage and control family-owned businesses and assets while minimizing gift and estate taxes. Ownership interests in an FLP are divided among family members, but the older generation typically retains control as general partners, while the younger generation holds limited partnership interests. Because of the restrictions on the sale and transfer of interests, FLPs can often utilize valuation discounts, such as minority discounts, to lower the estate and gift tax valuation of the partnership interests.

Examples

Real Estate Holdings: A family owns residential and commercial properties valued at $20 million. By forming an FLP, various family members may hold fractional interest in these properties, potentially reducing estate taxes when these interests are passed on to heirs.
Family Business: The Smith family owns a manufacturing business valued at $15 million. An FLP is formed, where parents retain 30% as general partners and 70% is distributed among the children as limited partners. This arrangement can reduce the taxable value of their estate while maintaining operational control.

Frequently Asked Questions (FAQs)

1. How does an FLP help in reducing estate taxes?

An FLP reduces estate taxes by applying valuation discounts (such as the minority discount) to the limited partnership interests. This decreases the taxable value of an individual’s estate.

2. What are the roles of general and limited partners in an FLP?

The general partners manage the FLP and have control over its assets, while limited partners hold an economic interest but no control over decision-making.

3. Can an FLP be dissolved or modified once it’s created?

Yes, an FLP can be dissolved or modified. However, this usually requires the consent of both general and limited partners, aligned with the terms outlined in the partnership agreement.

4. What are the costs of forming an FLP?

Costs include legal fees, state filing fees, and potentially appraisal fees for assets being transferred into the FLP. These costs can vary widely based on complexities involved.

5. Are there tax implications during the transfer of assets to an FLP?

Typically, transferring assets to an FLP is considered a tax-neutral event. However, future distributions and valuation changes may have tax implications.

Limited Partnership (LP): A partnership with one or more general partners who manage the business and are personally liable for its debts and one or more limited partners whose liability is limited to the extent of their investments.
Minority Discount: A discount applied to the valuation of an ownership interest due to its lack of control over the business.
Estate Planning: The process of arranging for the disposal of an individual’s estate in a way that maximizes its value by minimizing taxes and other expenses.
Gift Tax: A federal tax applied to an individual giving anything of value to another person or entity without receiving equal value in return.
General Partner: In a limited partnership, the general partner manages the business and legally binds the partnership.

Online Resources

References

“Federal Estate and Gift Taxes.” IRS. irs.gov
Cassady V. “Family Limited Partnerships Explained.” National Law Review. natlawreview.com

Suggested Books for Further Studies

Bove Jr., A. L. “The Family Limited Partnership Deskbook: Forming and Funding FLPs and Other Closely Held Business Entities.” American Bar Association, 2nd Edition.
Hoover, M. “Family Limited Partnerships: Practice and Planning Strategies.” ALI-ABA Press, Fourth Edition.
Jerry, S. A. “The Family Limited Partnership: Applications, Case Law and Property Interests.” CCH Incorporated, Latest Edition.

Real Estate Basics: Family Limited Partnership Fundamentals Quiz

### What is a Family Limited Partnership (FLP)? - [ ] A corporation owned by family members. - [x] A limited partnership whose interests are owned by family members. - [ ] A family trust used to avoid taxes. - [ ] A joint venture between unrelated family businesses. > **Explanation:** An FLP is a limited partnership owned by family members designed mainly for estate planning and minimizing gift and estate taxes. ### What roles do general partners play in an FLP? - [x] Manage the FLP and control its assets - [ ] Have a passive income interest - [ ] Can remove limited partners at will - [ ] Have no definite roles > **Explanation:** In an FLP, general partners manage the business and its assets. ### What benefit does an FLP provide in estate planning? - [ ] Increases the taxable estate value - [ ] Converts the assets to tax-exempt status - [x] Reduces the estate’s taxable value through valuation discounts - [ ] Guarantees estate taxes are eliminated > **Explanation:** FLPs often apply valuation discounts such as minority discounts, reducing the taxable value of estate assets. ### What is a minority discount? - [ ] An increase in value for minority stakeholders. - [x] A reduction in value for lack of control over business operations. - [ ] A special bonus for general partners. - [ ] A discount on taxes paid by minority stakeholders. > **Explanation:** A minority discount applies due to lack of control over the operations, reducing the perceived value of a stake in the business. ### Which partners hold decision-making power in an FLP? - [ ] Limited partners - [ ] All partners equally - [x] General partners - [ ] External advisors > **Explanation:** General partners have decision-making authority in an FLP, unlike limited partners. ### Can an FLP be dissolved or modified? - [x] Yes, with both general and limited partners' consent. - [ ] No, it is permanent. - [ ] It can only be dissolved by court order. - [ ] Yes, but only if all assets are sold first. > **Explanation:** An FLP can be dissolved or modified with the consent of both general and limited partners. ### Are there initial tax implications when forming an FLP? - [ ] Significant tax penalties may apply - [ ] There's an automatic 15% IRS fee - [x] Typically, there are no immediate tax implications - [ ] Formation is tax-exempt > **Explanation:** Transferring assets to an FLP is generally a tax-neutral event initially. ### How can the transferability of FLP interests be described? - [ ] Completely flexible without any restrictions - [x] Restricted greatly due to partnership agreements - [ ] Unlimited transferability to non-family members - [ ] Subject to federal approval > **Explanation:** The transferability of interests in an FLP is often restricted greatly due to the specific terms set out in the partnership agreement. ### What kind of valuation discounts might be available to an FLP? - [x] Minority discounts and lack of marketability discounts - [ ] Discounts on land taxation - [ ] Future value projection discounts - [ ] Executor's penalty discounts > **Explanation:** An FLP might apply minority and lack of marketability discounts to lower the appraised value of partnership interests. ### Which documentation is essential for forming an FLP? - [x] Partnership agreement and state filings - [ ] Federal charters and municipal approvals - [ ] County permits and Corporate minutes - [ ] Trade secret declarations > **Explanation:** Forming an FLP requires a formal partnership agreement and proper state filings.