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.
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.
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.
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