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The Many Uses of a Family Limited Partnership - Part III

 

Distributing the Limited Partnership Interest

Initially, the general partners possess all of the limited partnership interest. Over time, they may choose to give or to sell the limited partnership interests to other family members.

If the general partners present the interests as gifts, they are able to take advantage of the annual exclusion and the unified credit. Advantages of gifting through an FLP are that the general partners can retain control over the assets and retain an income from the assets. In direct gifting, the parents would have to give up all control to get the annual exclusion and unified credit.

Assets Transferred to Partnership

When the parents transfer assets to the Family Limited Partnership, the assets change titles. The partnership then owns the assets. Though all partners own an interest in the assets, they do not own individual assets.

Placing the assets into an FLP makes management of the assets easier. Instead of managing individual assets, the parents manage them as a whole. All of the assets will be in one place.

Initially, the general partners (parents) own all of the interest in the Family Limited Partnership. They may choose either to sell or to give the limited partnership interest to their family members. They would not keep all of the limited partnership interest as that would accomplish nothing. The FLP provides a way for them to get assets out of their estate and reduce estate taxes. Keeping all of the limited partnership interests would defeat the purpose of creating the FLP. The FLP provides a way for parents to transfer their assets and family business to their family while still maintaining control, receiving an income, and reducing gift and estate taxes.

It is easier for parents to give limited partnership interests (units) than it is for them to give individual assets to their children. It is difficult to give undivided portions of the assets or to divide them equally. It is easier to give children partnership units of equal value.

The Family Limited PartnershipThe parents can take advantage of the unified credit and the annual exclusion in both cases. However, they cannot maintain control of the assets if they choose to directly gift the assets to their children.

Transferring the assets into an FLP gets them out of the parents' estate, thereby reducing estate taxes. The assets in an FLP get a discounted value. When the parents transfer asset units to their heirs, the underlying asset value is greater than the value of the discounted unit. The discounted value of the asset units reduces gift taxes.

Discounts

Independent appraisers determine the discounted value of each limited partnership unit. Lack of marketability and lack of control are the two most common discounts relative to Family Limited Partnerships.

The Family Limited Partnership may be worth less than the full value of its underlying assets. Limited partnership interests generally receive a 20% to 50% discount.

Example:

Let's say that the parents have a business worth $12 million, and an appraiser supports using a 20% discount for lack of marketability and a 15% discount for lack of control.

  1. Business value: Multiply by 100% - 20% for lack of control.
    $12,000,000 x .80 = $9,600,000.
  2. Partially discounted business value: Multiply by 100% - 15% for lack of marketability. $9,600,000 x .85
  3. Discounted business value = $8,160,000.

Note: Notice that when you determine the business's discounted value, you do not add the two discounts together. Evaluate the first discount. Then, evaluate the second discount using the new total. So the total adjustment to the value is 32%, not 35%.

Your Family

A Family Limited Partnership is an excellent way to transfer your business and your assets to your children. You can pass assets (including the business) to your children while still maintaining control of everything. Control of the assets shifts when you decide or when the FLP terminates.

An FLP can involve the entire family in business decisions. Though family members, as limited partners, have little control, they are able to vote in some situations. You'll be able to see how different family members work together. An FLP will promote family unity.

A Lifetime of Work

Your estate is the result of a lifetime of hard work and success. A Family Limited Partnership will let you maintain control of your assets and/or business whether the income shifts to your children or not. You will also have the flexibility to make decisions as personal preferences or rules and regulations change.

As General partners, parents will have almost all of the control of the FLP. Children and other family members, as Limited partners, have little or no control of the FLP. They have no right to demand that distributions be made. Parents control what, if anything, the limited partners receive.

Part I >>
Part II >>

 

 

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