The Potential Benefits of Family Limited Partnerships
December 11, 2015
Give away eventual benefits now without surrendering current control. That is one of the guiding concepts behind the family limited partnership (FLP), a tool for managing family wealth.
For owners of small businesses, real estate, and other types of assets (including, in many cases, portfolios of marketable securities) an FLP can separate control from ownership, assuring appropriate management while distributing the financial benefits to family members most efficiently. For a family with significant financial assets, an FLP can provide a structure for managing those assets while gifting the benefits of those assets to the next generation.
What Is an FLP?
A family limited partnership is a form of asset ownership in which many people share ownership interest in the financial benefits of the asset, but only one or two have full operational control. Essentially, it is a business entity in which many people own interests, but only the chief -- referred to as the general partner or managing partner -- asserts executive authority. An FLP can be structured as the owner of record for almost any kind of incorporated business. An FLP can be the owner of record for a stock or mutual fund portfolio (as long as the general partner actively directs the investment policy, asset selection, and related elements of investment management). And an FLP can function as the property owner of record for any form of real estate -- not just offices, shopping centers, and apartments, but farms, ranches, and logging, grazing and mining lands.
How It Works
The FLP concept relies on a separation of ownership and control to allow you to give away ownership (to heirs, for example) without surrendering control. As general partner, you remain the only business decision maker -- acquiring and disposing of assets and drawing salary from the partnership, as you deem appropriate.
One of the chief advantages of this approach is the ability to make gifts at a discounted value, thereby reducing your taxable estate by an amount larger than the value of the gift. Another advantage is the potential to remove appreciating assets from your taxable estate. The discount arises because the actual gift is of limited partnership interests -- not the underlying asset. The limited partnership units are subject to a discount for various reasons, including the unit's lack of control and the fact that it is not readily marketable.
It is possible that a business might be appraised for a lower value now, when it has no proven market value as a going concern, than it might be later, when one or more offers have been received. A note of caution -- these discounts are subject to scrutiny by the Internal Revenue Service and must be determined by a qualified appraiser using an appropriate valuation methodology. In addition, the FLP appraisal should be updated each time you make a gift of the limited partnership interests.
Another advantage of the FLP structure is its potential liability shield. The assets you own outside the FLP will be protected from the activities of the FLP-held assets.
Is an FLP Right for You?
The FLP structure can be a comparatively high-maintenance form of ownership. It has many unique accounting, financial reporting and control requirements and requires the general partner to completely segregate his or her personal financial affairs from the partnership's accounts.
Because of the significant legal, accounting, and financial overhead, FLPs are generally seen as suitable for only larger assets -- businesses worth at least several million dollars or securities portfolios of $5 million to $10 million. Keep in mind that if an FLP-owned business is sold, the FLP itself can continue to operate as an asset manager for the proceeds resulting from the sale.
The decision to implement an FLP involves complex tradeoffs and can incur substantial costs. But as a tool for discounted giving and effective control, it can yield value for both your family and your estate.
For additional information, call Washington Trust Wealth Management at 800-582-1076.
The opinions expressed in this newsletter are those of the author and may not reflect those of The Washington Trust Company. The information in this report has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Any opinions expressed herein are subject to change at any time without notice. Any person relying upon this information shall be solely responsible for the consequences of such reliance. Performance is historical and does not guarantee future results.
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The views expressed here are those of Washington Trust Wealth Management and are subject to change based on market and other conditions. Investment recommendations and opinions expressed in these reports may change without prior notice. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.