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Briefly, a FLP is a separate tax entity, like a corporation. It files annual tax returns and its players consist of general partners and limiteds, usually in the form of family members. In most FLP's, the general partners are the spouses, or senior family members and the children and grandchildren are the limiteds.
Under current law, this allows the partnership creators to effectively control the assets held by the partnership, yet these assets are not considered part of their taxable estate with the exception of the actual general partnership interest.
Generally, a husband and wife would serve as the General Partners with a 2% interest in the Partnership and the children (and grandchildren) maintaining a 98% stake as limited partners. If the partnership assets create income, the GP's have the authority and discretion to distribute it, or simply have it retained by the partnership.
FLP's can effectively freeze the value of certain assets today, allowing future growth to accrue estate tax free to heirs.
They can provide for a discounting of property value based on the non-marketability of family partnership units (recent rulings have approved discounts of up to 15% to 35%).
They allow the parents to retain management control and income from partnership assets.
It allows the parent to maximize available gift exemptions without giving beneficiaries immediate access to gifted funds.
FLP's add an additional layer of creditor protection to partnership assets (including protection from a divorcing spouse of a child or grandchild).
While using a partnership to avoid state inheritance taxes may be sound planning, there are often pitfalls, which you must be aware of. In many cases, an excise tax may be imposed upon the transfer of real estate or business assets into the trust. Additionally, you will be required to file a separate tax return and reevaluate the value of partnership assets each time they are disposed of. This will require an independent appraisal each time before the limited units are gifted to your beneficiaries.
Family Limited Partnerships can be management intensive and require comprehensive accounting at all times. They are commonly audited trust strategies.
Action
To Take If you would like to learn more about Family
Limited Partnerships and
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