In a typical Family Limited Partnership (FLP), Mom and Dad transfer an asset to a limited partnership. In this partnership, the general partner will own 1% to 5% of equity and the limited partner(s) will own 99% to 95% of equity. Mom and Dad retain the general partnership interest (either individually or in an S Corporation) and subsequently gift the limited partnership interest to their children. If done properly, Mom and Dad have transferred the partnership property (and the income attributable to it) to their children at a low gift tax cost, while retaining significant control of the asset and possibly shielding them from creditors.
Some of the advantages of utilizing the FLP are as follows:
- The limited partners are generally not held liable beyond their investments for the liabilities and obligations of the partnership.
- The general partners, frequently the husband and/or wife manage and direct the partnership, thus making most major business decisions. The limited partners, the children, have limited control.
- A properly managed partnership affords excellent lawsuit protection. In other words, if the general partners, (the mother and father) own 5% of the partnership, generally their creditors can reach neither 5% of ownership interest nor the remaining 95% of ownership belonging to the children and grandchildren. They also cannot reach the actual asset inside the partnership.
- A Family Limited Partnership permits the use of valuation discounts which can significantly reduce the size of an estate subject to inheritance taxes.