For families with large communal assets – either in real estate or in a family business – Family Limited Partnerships (FLPs) can be invaluable tools for managing money and property. Even in the most congenial family relationships, communications can go sideways when a family member dies, leaves the business, or gets married or divorced. An FLP essentially acts as a contract among family members for management of shared assets. These agreements can save money and relationships, and they can also protect family members from creditors.
An FLP is a partnership agreement that is similar in principle to other types of partnerships. When family members organize as a partnership, they each continue to file their own taxes on any income or profits earned through the FLP. Partners take on different shares of the partnership according to the structure they select. As a limited partnership, an FLP provides for two types of partners. General partners bear all of the liability for the partnership; in exchange, they are the “managers” of the FLP, making all executive and business decisions. General partnerships are lifetime partnerships, but they can be transferred to other family members over time. By contrast, limited partners have less liability and less say in management decisions. Family members can allocate or give their shares to other family members to structure personal liability according to their preferences.
In general, Family Limited Partnerships can help partners avoid both gift and estate taxes. For instance, trades within an FLP may not be subject to the gift tax. Thus, if Partner A transfers limited partnership shares of the family business to Partner B, Partner B generally qualifies for the annual gift tax exclusion because he or she is related to Partner A. The benefit for estate taxation is related to these provisions; rather than conveying partnership shares upon death, older family members can gradually gift partnership shares to younger family members, thus helping those inheritors avoid a later estate tax burden.
In addition to the tax benefits, Family Limited Partnerships offer other financial and liability benefits to family members. First, administrative costs are typically lower when family members consolidate their assets into a single FLP. Second, the partnership agreement itself specifies which procedures the family must follow for major transactions such as sales of family property. These agreements specify what happens to partnership funds when, for instance, a married couple divorces. By establishing protocols for these transactions, family members can minimize or avoid family disputes and even litigation.
FLPs generally operate to reduce risk for participating family members. However, state laws regarding partnership formation may specify specific requirements in the establishment of an FLP. The consequences could be disastrous if an FLP agreement were declared unenforceable at a later date; for this reason, it is important to consult with a certified appraiser who can value communal property and a skilled lawyer who can draft the necessary documents.
The central governing document of an FLP is the partnership agreement. This agreement must be in writing and signed by all partners. Your Family Limited Partnerships lawyer can draft this document for you to ensure that it complies with all relevant laws and also accurately describes the desired partnership structure. The agreement will also identify all of the partnership property. Importantly, the partnership only applies to that shared partnership property, and not to personal property owned by individual partners. Once drafted, your attorney can also amend your partnership agreement as often as is necessary.
If you have additional questions about Family Limited Partnerships, or you need assistance with your partnership, contact the Law Firm of Badeaux & Associates at (281) 486-4737.