The Benefits of a Family Limited Partnership

If your family owns and operates a business, the creation of a family limited partnership (FLP) can provide both tax and liability advantages. FLPs are designed to allow family-owned businesses to be passed from one generation to the next, and as the name implies, only family members can be part of the partnership.

For purposes of an FLP, a family-owned business can include investment property, publicly-traded or privately-held securities, or other assets being managed by the parents. It does not necessarily need to be a brick-and-mortar establishment. It cannot include personal assets like one’s primary home, however.

If you would like to discuss the advantages of a family-limited partnership and you’re in Troy, Michigan, or anywhere in Oakland or Macomb counties, contact me at Redmond Law Group. I have been helping clients with business law issues and challenges for more than 15 years, and I will be happy to weigh your options with you regarding an FLP and help you set one up.

What Is a Family Limited Partnership?

In structure, an FLP is just like a regular limited partnership with two classes of partners: general partners and limited partners. In an FLP, the parents are the general partners and the children are the limited partners.

General partners assume all responsibility for managing the enterprise, whether a business or investment portfolio, while limited partners have virtually no say in the business. General partners also assume full liability, while the liability of limited partners is mostly shielded from creditors and legal action.

In essence, a family limited partnership is a legal arrangement for transferring assets to children with limited tax liability for gift taxes and estate taxes.

What Are the Advantages?

One of the primary advantages of an FLP is that it allows the general partners to make annual asset transfers to the limited partners while avoiding gift tax liability. The annual transfers must stay within the range of IRS-established annual gift tax exclusion, which is $16,000 for 2022.

The recipients, however, must pay taxes on what they receive. Unlike a corporation, in a limited partnership the partners themselves, and not the partnership, are personally responsible for any taxes.

An FLP also offers protection against estate taxes when the parents (general partners) die. The valuation of the assets transferred into the FLP remains fixed throughout the years. For instance, if an investment property is worth $100,000 when the FLP is created but rises to $500,000 before the parents’ death, the estate portion for taxation purposes remains at $100,000. The $400,000 gain transfers to the remaining partners.

Another benefit is that the assets are no longer legally under the control of the grantor and are thus shielded for the most part from lawsuits, divorce proceedings, and other such takings. Creditors cannot force distributions, vote, or own a limited partner’s interest without the approval of the general partners.

After divorce, a limited partner is no longer a family member and can be forced to transfer back their share at full market value.

Are There Disadvantages?

FLPs can be expensive. Along with ongoing legal costs, assets placed into the FLP must be appraised, whereas assets placed in a trust need not be appraised. Assets that can be transferred into an FLP are somewhat limited as well. FLPs are designed for closely held businesses and their affiliated real estate, securities, and other investment assets.

An FLP doesn’t necessarily resolve conflict among the children. When the founding parents die, the children may argue about whether to sell the family business.

Finally, general partners assume full liability while protecting the limited partners. To avoid that liability, however, you can create an LLC (limited liability company) and designate it as the general partner for your FLP to protect assets you place into your FLP from the reach of creditors.

How a Knowledgeable Attorney Can Help

Family limited partnerships are valuable tools for protecting assets while minimizing or eliminating estate tax and gift tax liability, as well as shielding assets from creditors.

How you structure your FLP and draw up the operating agreement are important considerations, and in these areas, you certainly need the help of an experienced and knowledgeable attorney.

If you’re considering the establishment of a family limited partnership, contact me at my office in Troy, Michigan, for an initial consultation. I proudly serve clients throughout Macomb and Oakland counties.