Family Limited Partnerships, Distributions and Valuations

A Family Limited Partnership (FLP) is a partnership formed by family members to facilitate the preservation, management, distribution, 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:

Management and control of family assets during the lifetime of the senior family members, and the maximization of value as the assets are passed on to heirs;
Reduction of current income taxes;
Reduction of the taxable value of the family's estate;
Facilitation of gifting; and
Protection of family assets from the unreasonable claims of creditors

Family limited partnerships, distributions and valuations.

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 (sometimes a charity, also), who collectively own 99% of the partnership. The corporate general partner (CGP) owns 1% of the partnership and is the manager of the family's assets. The family members own the CGP, and sometimes a charity or other non-family member owns a small portion. This structure allows the family to maintain total control over its assets and achieve the greatest value in terms of wealth transfer. The partnership is revocable. The family never gives up control.

Income Tax Advantages of a FLP

The CGP is entitled to a reasonable management fee for managing the assets held by the limited partnership. The management fee is tax deductible to the partnership. The fees collected by the CGP can be used to pay reasonable salaries to the family members employed by the CGP. The remaining income earned by the CGP can be used to provide a variety of benefits for its employees, providing tax-deductible expenses to the CGP; thereby, reducing taxable income for the CGP and its employees. The CGP can sponsor retirement plans and other employee benefit plans for its employees, who are typically family members.

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 while maintaining effective control over the assets. Using a FLP, a gift of $10,000 of FLP interests effectively represents $16,666 of asset value, if the asset 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 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.

Cure Title Defects

The process of transferring assets to a FLP can determine, during life, 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 Family Limited Partnership 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 Tax 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 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

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All Issues of Compensation overseen by ATI Capital Group, acting as Chairman of Independent Compensation Committee

A. Internal Revenue Code (IRC) Section 162 compliant job descriptions are necessary to justify Management Fee paid by the Limited Partnership to the General Partner, as well as the compensation taken by the executive of the General Partner (if a 'C' corporation, 'S' corporation or LLC).
B. An IRC Section 162 compliant Incentive Compensation Plan is necessary to the justification of management fees charged by the General Partner and paid by the Limited Partnership. The existence of a well-drafted plan can substantially increase the management fee.
C. Employment Agreements between the General Partner and its employees are necessary to justify employment status and compensation. A prototype will be provided by ATICG.
D. A formal Management Agreement between the General Partner and its Limited Partnership is necessary as a justification of fees charged. A prototype will be provided by ATICG.
E. Provide Income and Estate Tax Planning, and Retirement Planning for Client and succeeding generations with numerous tools such as 125 Plans 419, 412 (i), DB & IRA Rollovers as well as ILITs.

NOTES
1. Projects A, B, C, and D are the foundation of the overall management Fee and Executive Compensation Study (MFECS). Without a well-conceived foundation, the MFECS will not, in our judgment, comply with IRC Sec. 162 (a) or the relevant case law and Revenue Rulings governing the deductibility of compensation as an expense.
2. It is suggested that an Independent Compensation Committee be established for the overall family business structure and that ATICG, together with one additional outside professional advisor and the client's representative, comprise the Committee. This strategy establishes the independence of the Compensation Committee and adds credence to the Committee's decisions.

FLP Articles

Power Planning ESOPs and FLPs
Corporate General Partner Structuring (Reducing the Need for a Valuation)
Size of Block Valued
Stacking Discounts
Double Discounts - Fact or Fiction
Deeper Discounts - Reduced Taxes
Family Attribution and the IRS

FLP Documents Download

FLP Data Request Checklist
Timing the Funding of a Family Limited Partnership
Family Limited Partnership Structure Diagram
ATICG's Professional Services for the Support of FLPs
Representation Letter


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