What is a Family Limited Partnership?
A family limited partnership (FLP) is a type of partnership that is often used as a tool for estate planning and wealth management. An FLP is a legal entity that is created by a family to manage and hold assets such as real estate, investments, and business interests.
An FLP is typically formed by a family member, who is known as the general partner, and other family members, who are known as limited partners. The general partner has overall control of the partnership and is responsible for managing the assets and making decisions on behalf of the partnership. The limited partners have limited control over the partnership and are not involved in the day-to-day management of the assets. They do, however, have the right to receive a share of the partnership’s profits and assets.
Family Limited Partnership Benefits
One of the main benefits of a properly planned and operated FLP is that it allows families to transfer ownership of assets to the next generation while reducing gift and estate taxes. Because the limited partners do not have control over the partnership, they are not considered to own the assets directly, which means that they may be eligible for certain tax breaks when the assets are transferred to them.
An FLP can also help protect the assets from creditors and legal claims by separating ownership from control and limited the liability of the limited partners.
It’s important to note that FLPs are complex legal structures and can be subject to tax and legal challenges. It is advisable to seek the advice of a financial planner or attorney before setting up an FLP.
How to Use an FLP to Reduce Taxes
There are a few ways that a business owner can use a family limited partnership (FLP) to potentially reduce their tax liability.
Business Assets Transfer
One way is by transferring ownership of business assets to the FLP. Because the limited partners in an FLP do not have control over the partnership, they are not considered to own the assets directly. This means that the business owner can transfer ownership of the assets to the FLP without incurring gift or estate taxes on the transfer.
The limited partners can then sell their interests in the FLP at a later date, potentially at a lower tax rate than if they had inherited the assets directly.
Another way to use an FLP for tax reduction is by taking advantage of the valuation discounts that may be available for limited partnership interests. Because the limited partners do not have control over the partnership and may not be able to sell their interests easily, their interests may be valued at a discount for tax purposes. This can result in a lower overall tax liability for the family when the assets are transferred.
An FLP allows for the management of a wide range of assets, such as real estate, investments, and business interests, and can be used in conjunction with other estate planning and wealth management strategies.
Often, FLPs are created before a business owner has decided on their final successors. If a senior-generation business founder-owner is the general partner of an FLP, they can maintain control of the family business or real estate portfolio in the FLP. This allows their children to own an economic interest in the business as limited partners while the parent retains full control.
Then, when the senior-generation business owner is no longer in a position to exercise control over the FLP, they can determine who will receive their general partner interests. This could be a third-party advisor or a family member who is leading the business as president, who specializes in real estate transactions, or who is an experienced investment professional. In any case, an FLP provides flexibility in that it is often planned, established, and operated well in advance.
Examples of Note
There have been several high-profile ultra-wealthy families that have reportedly used family limited partnerships (FLPs) as a tool for estate planning and tax reduction. One example is the Walton family, the owners of Walmart. The Waltons have used FLPs as part of their overall wealth management strategy, and the partnerships have helped them to transfer ownership of assets to the next generation in a tax-efficient manner.
Another example is the Mars family, the owners of the Mars candy company. The Mars family has used FLPs as a way to transfer ownership of their business to the next generation while minimizing taxes.
Delap can Help
Wondering if a family limited partnership is right for your family? Our team at Delap Wealth Advisory is ready to support and advise you. Start a conversation with an advisor today.
This blog is for informational purposes only. It should not be retransmitted in any form without the express written consent of Delap Wealth Advisory, LLC, an investment advisor registered with the United States Securities & Exchange Commission. The contents of this communication should not be construed as investment advice intended for any particular individual or group of individuals. All information, statements, comments, and opinions contained in this blog regarding the securities markets or other financial matters is obtained (or based upon information obtained) from sources which we believe to be reliable and accurate. However, we do not warrant or guarantee the timeliness, completeness, or accuracy of any information or opinions presented herein. Any historical price or value is as of the date indicated. Information is provided as of the date of this material only and is subject to change without notice.
Investing in securities involves the risk of loss, including the risk of loss of principal, which clients should be prepared to bear. No assurance is given that the investment objectives of any investment described in this communication will be achieved. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. The information contained in this blog is not intended as tax or legal advice, and Delap Wealth Advisory, LLC, does not provide any tax or legal advice to clients. You should consult with our firm or other independent financial, legal, and/or tax advisors before considering any investment or participation in any investment program.