One of the biggest challenges in Wealth Advisory is working with a client who knows and understands the need to affect an Estate Plan, but is reluctant to do so since it may mean losing control of their assets during their lifetime. For many years, this was a difficult obstacle to overcome for planners. It was not until the 1980’s that a tool came into prominence that could address these concerns. This tool is the Family Limited Partnership (FLP).
In essence an FLP is no different than a traditional limited partnership, other than the partners here are all family members. One crucial distinction is that at least one person, usually the parents, are named as general partners. By being a general partner, the parent(s) holds the power, i.e. control, over the partnership. Therefore, they will make all decisions related to the FLP and how it will be run. The limited partners, the children, will be able to receive income and other benefits from the FLP but do not participate in running the FLP. This gives the parent concerned with losing control of their assets, the control they desire.
But how can this assist from an Estate Planning perspective? One of the keys to an FLP is that it provides the 2 things all planners seek with Estate Planning tools: discounted gifts and leveraged gifts.
When an FLP is established, the parents are usually made general partners as noted. But one critical part of the design is to only designate them as a 1.00 -2.00% general partner. Why? Upon death, only this 1.00-2.00% of the partnership’s total value will be included in their taxable estate. So the FLP has given the desired control for the parents without the inclusion of the assets in their estate.
The next step is one of the foundations of an FLP. The parents each year gift limited partnership shares to the children. But because the shares are in a limited partnership, the IRS allows for significant discounts on the value of these gifts (due to lack of marketability and minority interest). In fact, it is not uncommon to see discounts of 35% to as much as 50% in some cases. This makes FLP’s an excellent gifting vehicle since it allows a parent to give away far more than what is valued as the actual gift.
In addition, the FLP can hold a wide range of assets including the family business, real estate, investments or also insurance to be used for estate liquidity purposes. This makes FLP’s one of the most flexible planning tools.
FLP’s are a powerful and effective estate planning tool that can provide a multitude of benefits not only for the heirs, but also for the parents during their remaining lifetime. It can provide a vehicle that manages a wide range of assets allowing for control while simplifying and streamlining the transfer of assets to the heirs. FLP’s accomplish all this while providing a substantial gifting tool allowing for deep discounts on transferred assets. With careful planning and attention to detail along with experienced counsel, FLP’s can be an extremely effective Wealth Advisory and transfer tool.