Family Limited Partnership (FLP) for Estate Planning and Heritage Protection – Beneficial or Risky?

If you have assets of $ 1,000,000 (or even less in certain circumstances) to contribute, while keeping other assets sufficient to support you for life, you may want to consider starting and operating a family limited partnership. between members of your company. family.

Yes, an FLP is only for high net worth individuals who have significant assets and can afford to pay thousands of attorney fees to install it, to cover the expert&39;s expert fees as well as the costs of exploiting the bankroll in order to maintain it properly.

This can be as simple as if the husband and wife were giving an FLP with an asset of $ 1,000,000 or less, that it&39;s real estate property such as rental property (but not the principal residence ), money, values, business interests, etc.

As sponsors of a FLP, the spouses may hold a 10% partnership interest and a 90% limited liability interest.

The spouses, as general partners retaining an interest in a limited partnership, may then transfer limited partnership units representing the remaining 90% of the limited partnership to their children.

I. Advantages of an FLP:

A. Control of transferred assets:

The FLP Operating Agreement governs the administration, management, investment and distribution of income and assets in the event of termination. This may also limit the transfer of partnership or interest units to third parties.

The general parents partners would have control of the management and investment on the assets of the partnership, excluding children limited partners.

More importantly, it is the general partners who decide when and to what extent the partnership revenue can be distributed to the partners. They may also prohibit the transfer of partnership units or interests outside the family.

The General Partners may also form an irrevocable trust to which their interests in the Partnership would be transferred and administered by an independent trustee, or form an entity as a general partner managed by an independent trustee.

B. Present value of gifts to children:

Parents are allowed to make tax-free gifts to children or grandchildren, valued at $ 12,000 (or $ 24,000 in donations divided by both parents) each year.

These annual donations can take the form of limited partnership units in a FLP, taking advantage of the $ 12,000 annual gift exclusion to reduce death duties.

In the context of a FLP, parents can additionally take advantage of the rules of assessment of inheritance and inheritance rights applicable to minority interests, resulting in a lack of control as well as a lack market quality (non-liquidity) to reduce transfer taxes.

An evaluation expert can determine a 20% discount on the value of a partnership unit given as a gift, due to a lack of control, as well as another 20% discount due to of a lack or marketability. Such discounts can not normally be awarded in the form of a gift of similar value, intended for children.

The estate values ​​of parent-owned partnership units can also be reduced by the above-mentioned discounts, resulting in lower inheritance taxes.

C. Tax benefits:

An FLP, as a partnership, is a reporting mechanism whereby deductions and income from partnerships are directly charged to partners, whether they are general or limited, and taxed at their own rates. 39, individual taxation.

Thus, an FLP allows the proportionate share of the participation company&39;s income to be moved from the relatively higher parental tax rate to the lower tax rates of the children with limited income.

In addition, a FLP may make income distributions to the sponsoring partners – children to help them pay the income taxes attributed to the FLP.

D. Benefits related to asset protection:

Another advantage of an FLP is the protection of the assets of general partners and limited partners vis-à-vis their creditors, seeking to execute judgments on the underlying assets of the company. But the lack of commercial purpose of an FLP can cause the court to pierce its veil and make it an alter-ego of the general partners.

In fact, general partners and limited partners own only shares or interests (personal property) in a partnership or partnership (personal property) in a FLP. They do not directly own the property (real or personal) of the FLP.

The interests of the limited partnerships may be offered to minor children through an irrevocable trust for children, which would provide additional protection of the assets vis-à-vis the creditors of the principal partner&39;s donor and children.

II. RISKS OF ONE FLP:

A. Court&39;s decision that the assets transferred to a PAF are included in the parent&39;s gross estate:

An FLP would not work as discussed above, if a court decided that it was not created, implemented, and functioned properly, that is, there was an implicit agreement that the parents- General Partners would retain the full enjoyment and economic benefit of the FLP assets. .

The Internal Revenue Service (IRS) seeks to show no reduction in the valuation of gifts, as well as to include in the gross assets of the parent company the donor transferred to an FLP, in accordance with the Internal Revenue Code § 2036 (a), which only authorizes sales exemption fide.

Indeed, an FLP is vulnerable if it does not have a legitimate business purpose, does not have commercial assets as assets, or a non-tax purpose. Avoiding donations or reducing inheritance taxes and income taxes can be considered as insufficient justification for its existence.

B. Lack of Core Cost Increases for the Partnership Assets upon the Death of the General Partner:

If a low-cost asset is transferred to a FLP, the owner-parent renounces the potential increase in the base upon the parent&39;s death. If an asset has been fully amortized and / or highly valued, an FLP may not be at all advantageous, or even risky, because of its inability to use the initial cost base of the asset.

In fact, transfers of assets to an FLP give rise to transfer taxes that could have been avoided, as well as the impossibility of transmitting the inheritance to assets with a full cost price.

III. Conclusion:

A Family Owned Partnership (FLP) presents complex issues and pitfalls for gift appraisals, the inclusion of assets transferred into the donor&39;s estate, the tax burden and the application of the criteria for the sale of good faith at fair market value.

As an estate planning and asset protection vehicle, a FLP is designed for high net worth individuals who are not weak minded and are willing to spend on their own organization, funding, implementation, active management and exploitation.

(The author, Roman P. Mosqueda, has practiced partnership law and family law for more than 15 years in California.

This article is intended for informational purposes only and does not constitute legal advice. If the reader has specific problems regarding the family limited partnership, it is advisable to consult a competent lawyer and an accountant.)