Passing down a family business, or family wealth in general, can be a challenging component of estate planning. There are number of different strategies that can be used to manage a family business while you are alive; however, the ideal situation is to create a scenario that allows you to manage the business while you are alive and pass down the assets owned by the business to future generations without subjecting the transfer to a significant tax burden. One option is to create a Family Limited Partnership, or FLP. When a FLP is created and used properly it can save a substantial amount of money that an estate might otherwise lose to gift and estate taxes.
And FLP is structured and operates just like any other limited partnership except that the members of the partnership are also members of the family. Just like other limited partnerships and FLP includes two types of partners-general partners and limited partners. The way a FLP works is that the senior members of the family transfer family assets, such as real property or other business assets, to the FLP in exchange for a small general partner interest in a much bigger limited partner interest. Because the senior members of the family retain general partnership interest in the FLP they will retain control of the partnership. They will also be liable for the partnership business.
Over time, the senior members of the family will slowly gift their limited partnership interests to younger members of the family. Younger members of the family may then receive income from the partnership but will have no say so in the partnership decisions. Senior members may use the annual gift tax exclusion to gift their limited partnership shares to future generations. Not only does this shield the transfer from gift and estate taxes but the transfer may also be eligible for valuation discounts. In essence, this allows the senior members to gift assets that appraise at a lower value, meaning that they can shield even more assets from taxes that typically applied to the transfer of wealth.
Yet another benefit to creating a FLP is that it may be able to shield assets held by the partnership from claims of creditors in the future, including claims by future tax spouses. Finally, a FLP is a fairly flexible entity which allows you to make changes to the partnership as changes in the family dictate.
If you think that a Family Limited Partnership could work for your family, consult with your estate planning attorney to discuss the details.