You have a large estate, and much for which to be grateful.
You have worked hard all your adult life, and you have built a legacy. You know that the time will come that you will pass away, and you likely don’t want that legacy to be buried with you as if you were an Egyptian pharaoh.
But of course, if you are an Egyptian pharaoh, you can disregard the rest of this.
Most of the rest of us may have a complex or large estate that may feature real estate, vehicles, investment accounts and insurance policies. Each of these assets can be handled differently in terms of taxes, creditors and liquidating for beneficiaries and heirs.
With a complex and/or large estate, there can be a lot of details to work out to make sure that everything goes where it’s supposed to as you like. This is where a Family Limited Partnership can be a valuable estate planning tool in establishing proper transfer of assets while keeping the tax man and creditors away.
What is a Family Limited Partnership?
Similar to a partnership for businesses, a Family Limited Partnership (FLP) is a legal agreement in which members of a family pool all their assets under one umbrella and share and distribute “interests” in the partnership among each other to avoid gift and estate taxes, as well as protect assets from creditors.
And like a business partnership, it can be set up with two different types of partners – a general partner (GP) and a limited partner (LP). The general partner is the one who has the control and management power of the assets in the partnership – he or she can trade, transfer, sell or buy assets of the partnership and set timetables for any action involving assets or any of the partners.
A limited partner is any family member that would not have control or management authority over the assets in the partnership, but would be eligible to own and receive “interests” in the assets of the partnership. All family members who might be in a will, for example, could be considered limited partners in an FLP and have access to the assets in the partnership
What are Benefits of an FLP?
As mentioned briefly, a family limited partnership provides great benefits in estate taxes, gift taxes and debt protection for assets contained in the FLP.
The senior members of the FLP (the GPs, usually the parents or grandparents of the family) can get benefits from the FLP with the power to transfer assets to their children or into a trust set up on the children’s behalf (if the children are minors). That transference lowers the taxable potential of the estate, while the GPs maintain control of the assets in the partnership.
For example, parents could transfer “interests” in a $500,000 home to their children as LPs in the partnership, even as the parents maintain control of the house. The asset hasn’t actually changed hands, but the “interest” was transferred, and that will reduce the value of the estate for the parent homeowners by the value of the home.
The IRS has a gift tax exemption in its rules, which allows GPs to provide assets or cash gifts to other members of the partnership that are exempt from the gift-tax exemption, which means the value of the asset can be greater than the current limit of $12,000 and not get taxed on the gift as long as it was given from one FLP member to another.
This means, if a parent has a $25,000 vehicle in the partnership and wishes to give it to an 18-year-old limited partner (LP) as a gift, the GP can do so without having to pay tax on the gift, as the asset, giver and receiver are all within the confines of the FLP.
A third big benefit is a protection from creditors. All of the assets in an FLP can be protected and are not required to be used to pay off any outstanding debts of the estate (mortgage, car loans, credit cards, etc.). It’s a way to shield money in case creditors take out a judgment or put a lien on the estate the FLP would be considered separate from the rest of the estate thus the lien would not be attached to any asset inside the FLP.
Flip Your Estate with an FLP
There are wills, powers of attorney, and trusts to make up a “traditional” estate. But when you have a complex or very large estate to plan for the future, sometimes working with single tools at a time can leave some gaps in details which could cost you thousands if not millions in taxes at the time of the estate disbursement. A Family Limited Partnership (FLP) can flip much of the tradition on its ear and provide you with the security and convenience of tax shelter and debt protection with much less hassle than individual documents for every asset tool.
Contact us today for a free consultation with our estate-planning attorneys who know about FLPs and can help you determine if an FLP would be right for your estate. Your family members are your partners in life; enrich your legacy by making them partners for life.