When it comes to passing on wealth to future generations, a Family Limited Partnership (FLP) can be a useful estate planning tool. By combining asset control and potential tax advantages, FLPs offer families a structured way to manage and transfer wealth, while maintaining flexibility and oversight.
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What is a Family Limited Partnership?
A Family Limited Partnership (FLP) is a pass-through entity commonly used in estate planning as a means to protect and pass along wealth to future generations. It allows family members to pool assets (such as investments and real estate) under one partnership while retaining control and providing certain tax and legal benefits.
A FLP consists of a general partner (often a parent), who runs the business and is liable for its debts, and limited partners (often children or other heirs), who are passive investors and are not liable for partnership debts. Limited partners also have little-to-no decision making power.
What are the differences between a Family Limited Partnership and a trust?
A Family Limited Partnership is considered a business entity, while a trust is a legal arrangement where a trustee holds assets for beneficiaries. Both are used in estate planning, but have different goals and tax implications.
Your wealth manager will be able to help you decide the best estate planning strategy for you.
How can a Family Limited Partnership play a part in estate planning?
Gift ownership interests
A FLP allows partners to gift ownership interests of the FLP to heirs throughout the general partner’s lifetime, rather than gifting the actual assets themselves. And by taking advantage of valuation discounts (lack of control and lack of marketability discounts) on the FLP interests, you can potentially see significant tax savings.
Retain control
Even after transferring ownership interests, you as the FLP general partner still retain control over assets.
For example, let’s say a couple transfers a $5 million real estate portfolio into an FLP. They retain 1% ownership interests as general partners and give 99% as limited partnership interests to their children over time. The limited interests may be valued at a discount for tax purposes, while the parents still manage the properties.
What are the downsides of Family Limited Partnerships?
Setting up a Family Limited Partnership is complex and will require the guidance of legal and financial experts who are well-versed in all aspects of FLPs. Additionally, the IRS keeps a close eye on FLPs to make sure they are not simply used as a vehicle for avoiding taxes.
Develop the best estate planning strategy with Landmark Financial
When you work with Landmark Financial, we help you develop an estate plan that addresses wealth transfer, tax reduction, charitable gifting, and trust services. Get in touch with us here.