Family Limited Partnerships

Implementation and Design

A Family Limited Partnership ("FLP") is a partnership formed by family members to facilitate the preservation, management, and maximization of the family's assets. The partnership is generally managed by a family corporation to ensure the viability of the partnership for succeeding generations. FLPs can provide solutions to many of the fundamental challenges families face, such as:

• Proper management of family assets during the lifetime of the senior family members
• Maximization of value as the assets are passed on to heirs

Structure of a FLP

Typically, the assets of a family are contributed to a family partnership in return for limited partnership units. The limited partners are generally the husband, wife and children who collectively own 99% of the partnership. The Corporate General Partner ("CGP") purchases from the partnership the remaining 1% partnership unit and enters into a contract to manage the partnership assets. The CGP can be in the form of an irrevocable trust or a corporation. For purposes of illustration, we will examine the CGP. All family members own a minority block of stock of the CGP, along with a charity or other non-family member(s). This structure allows the family to achieve the greatest value in terms of wealth transfer. Fees paid to the CGP by the FLP are taxable to the corporation and deductible to the partnership. This money is used to compensate the family members who provide services to the partnership for asset management and running the family business. The corporation has a board of directors, officers and employees. The company pays salaries and wages and hires other outside professionals necessary to effectively run the business. The corporation may contribute money to qualified, or non-qualified retirement plans, as well as pay and tax deduct all reasonable expenses as allowed under IRC §162 (see our discussion about Executive Compensation in Section 5).

Income Tax Advantages of a FLP

Once properly structured, and with the approval of the general partner or as prescribed in the partnership agreement, some, most or all of the limited partnership units held by any limited partner can be gifted to family members, sold to a trust in exchange for a note, or gifted to a charity in any combination. If gifted to a charity, the grantor will receive an income tax deduction for the fair market value of the gift. It is important to note that not all features and benefits may be advantageous in all situations and much depends on the facts and circumstances of each case. For example, if the general partner decides to purchase the limited partnership units back from the trust or the charity, it can generally do so without the other limited partner’s consent. This can reduce the amount of assets inside the partnership which is not necessarily beneficial to the other limited partners. Sometimes this can be offset with life insurance inside the FLP.

Asset Protection

Once properly structured, absent fraud or willful misconduct, the FLP provides asset protection that is unparalleled. Assets inside the FLP are not subject to the claims of personal creditors of any of the partners. If a partner is unfortunate and has a judgment levied against him, the best the holder of the judgment can achieve is a “charging order” for the limited partnership interest owned by that partner. A charging order is similar in nature to being an “assignee owner,” as such, the charging order does not allow the party to attach to the partnership assets, cause the liquidation of the partnership, or require the partnership to otherwise distribute any assets to the partner in question. To add insult to injury, the assignee or holder of the charging order will receive a K-1 at the end of the year and will be required to pay income tax on the pro-rata share of the partnership’s income. Collectively these features make FLP’s very attractive as an asset protection devise.

Estate Tax Planning

The general partner manages the assets contributed to the family limited partnership. Limited partners have few rights with respect to the assets held by the FLP. The lack of marketability and the fractional ownership of the limited partnership interests held by the limited partners are two of the well-established discounting principles that reduce the value of the taxable estate. The discounts afforded by the restricted ownership not only reduce the value of the assets held by each limited partner, but also increase the amount of annual tax-free gifting that can be achieved. Considering the excessively high marginal estate tax rate, wise and prudent planning is necessary to preserve the family's wealth.

Gifting

A FLP allows one to make lifetime gifts of limited partnership interests to other family members while the CGP remains in effective control over the assets inside the FLP. Using a FLP, a gift of $11,000 of FLP interests effectively represents a gift of $18,333 of asset value, if the assets were held outside the FLP structure.

Centralized Management of Family Assets

The FLP's corporate general partner controls the assets held in the partnership. The CGP employs family members and others and conducts meetings and training sessions to educate and facilitate wealth management for future generations. With a corporation as the general partner, continuity is assured even at the death of the husband and wife.

Minimize Probate

A FLP minimizes the time and expense involved in probating an estate by consolidating various diverse assets into two assets: an interest in a FLP, and the stock held in the general partner entity. A FLP is not a substitute for a will, but it does reduce the assets controlled by a will and minimizes the involvement of probate, which can be costly.

Cure Title Defects

The process of transferring assets to a FLP can determine if there are any title defects that need to be corrected. This can be a critical issue for valuable properties if it is not discovered in a timely manner.

Experience Counts in FLP Valuations

ATICG has performed literally hundreds of FLP valuations. In addition, our experience is deep in the structuring and implementation of FLPs, having assisted numerous law firms with the creation and implementation of FLPs designed to accomplish the specific needs of individual clients.

ATICG has successfully defended the interests of the Petitioner (the taxpayer) in both Tax and Federal Court. ATICG has also been retained by the IRS to represent the interests of the Respondent (the IRS) in Tax Court and is often called upon to provide consultation on FLPs or other valuation issues. The fact that ATICG has been retained both by the Petitioner and the Respondent for major Tax Court cases provides a strong indication of the respect for our work in the professional community as well as our independence.

Whether for asset protection, the ease of managing diverse assets, passing on the family business to your children, avoiding probate, or the sometimes significant reduction in income, estate and gift taxes, family limited partnerships are a powerful tool which should be considered by those with substantial estates or business interests.

Services Provided to the Corporate General Partner

All Issues of Compensation Overseen by ATICG, Acting as Chairman of Independent Compensation Committee

NOTES

FLP Articles

FLP Valuation Discounts - It's all about finding a better proxy

FLP Documents Download

• Document Request Checklist
• Representation Letter
• FLP Valuation Highlights and Qualifications

Download the FLP Fee Schedule in PDF format to assist you in planning your Limited Partnership.
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