Posted by: Woodfork Law | May 28, 2013

The Family Limited Partnership

A Family Limited Partnership (FLP) is an advanced estate planning tool used to facilitate the transfer of wealth to younger generations.  The FLP is a fairly complex tool that is difficult to create.  However, if appropriate, the FLP can provide great advantages.  First, the FLP can help facilitate gifting.  Very generally, because the children are receiving limited partner shares, the value of these shares/assets are “discounted.”  In effect, the FLP gives you the ability to gift more than $13,000.00 (the Federal gift tax exemption).  Second, the FLP will allow you to maintain control.  Essentially, you can transfer the value of the assets to the partnership without transferring control of the assets.  Third, the FLP pays no tax and it is passed through to the limited partners (children).  Thus, the kids are taxed at their lower rate.  Finally, assets in FLP are generally protected from creditors.

There are 2 clear disadvantages to a FLP.  First, the interest in assets are being transferred to the younger generation while you are alive.  Therefore, as with gift transfers, there is no “step up basis.”  Basically, your children receive the assets with your old low basis.  This could have significant tax consequences when your children want to sell.  Second, a FLP is very costly.  A few of the obvious costs include, fees to set up the partnership, appraisal costs, attorney fees, gift tax returns, and annual partnership returns.

Given the above, a FLP is normally used for big estates with possible tax concerns.


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