Those who leave behind large estates run the risk of getting stuck with significant estate or gift taxes. Fortunately, there are a few ways to avoid this, one of which is to create a family limited partnership (FLP). To learn more about establishing an FLP, you should consider contacting an experienced Evanston estate planning attorney who can evaluate your situation and explain your options.
What is a Family Limited Partnership?
Family limited partnerships are legal structures, in which family members can pool their investments, whether they consist of stocks, bonds, real estate, personal property, or other valuable assets. Like other partnerships, FLPs are made up of both general and limited partners. General partners control all investment and management decisions and so bear full responsibility for any liability incurred by the estate. Limited partners, on the other hand, cannot actually make management decisions, but are able to collect income. However, because they have no share in management, their share of liabilities is limited. FLPs aren’t taxable, so the owners report the partnership’s deductions and incomes on their personal tax returns in proportion to their individual interests.
In most cases, senior family members agree to contribute assets to the partnership in exchange for a minor general partner interest and a more significant limited partner interest. In this way, the older relatives can later give their interest to their heirs directly or through a trust.
There are a number of estate tax-related benefits to creating an FLP. For instance, senior family members can transfer their limited partnership interests to members of their family, which removes those assets from their estate for tax calculation purposes, but allows them to retain some control over the decision of the investment. Limited partners are also often eligible for valuation discounts at the time of the transfer. This is because the IRS does not value partnership units at their net asset value, but instead base them on a variety of other factors, such as a lack of control or an inability to sell unless majority partners agree to the transfer. Resulting savings are referred to as discounts for lack of marketability (DLOM).
These transfers of partnership interests also qualify for the gift tax exclusion each year. This is because gifts of FLP interests do not trigger federal gift taxes, as long as they don’t exceed a certain amount, so general partners can transfer assets held in the partnership to their heirs every year.
Finally, FLPs can protect assets from the claims of creditors, who are not permitted to own an interest of a limited partner unless all of an FLPs general partners consent. Furthermore, if a limited partner obtains a divorce and so ceases to be a family member, he or she can be required to transfer the interest back to a family member for fair market value.
Call Today for Help Planning Your Own Estate
Creating a family limited partnership can help eligible parties save a significant amount on estate and gift taxes, so if you are beginning the process of planning your estate, please contact the legal team at Orlowsky & Wilson, Ltd. Attorneys at Law by calling 847-325-5559 to speak with an experienced Evanston estate planning attorney who can address your concerns.