January 19/26, 2015; Volume 28/Number 15
By Bart Basi
Many people want to enrich their families with wealth and possessions, but face losing control of the assets once given and running into estate tax issues when assets are appreciated. The Family Limited Partnership (FLP) is a solution to this problem.
An FLP is a device that allows the grantor to fund the device, transfer value to heirs, keep control over the assets and reduce gift and estate taxes. In practice, an FLP is similar to a trust in that assets are transferred for the current and future benefit of another while allowing the grantor to keep control. The FLP differs from a trust in that it provides for additional tax and nontax advantages while offering potential unlimited life, operating after the grantor’s death.
An FLP is simply a Limited Partnership formed under state statute, owned by family members. The parent retains 1% to 2% interest as the General Partner. The children are then granted up to 98% interest as Limited Partners.
While a typical partnership can be formed with no written agreement, the Limited Partnership requires that it be formed according to state statute, otherwise the IRS is free to scrutinize the FLP as a tax avoidance device.
Consolidation of management is a benefit of the FLP structure. Instead of setting up separate trusts, bank accounts and brokerage accounts, the FLP uses one central account. Unifying the investment provides longevity as long as it can be operated post death by a family member.
The FLP also provides the benefit of creditor protection. Assets involved in businesses, especially a closely held business owned by a minority non-voting shareholder, are often not attractive to creditors or potential ex-spouses.
When valuing an FLP, houses, cars and antiques must be valued by a qualified appraiser who will appraise the business using a variety of methods that may be advantageous to your estate tax position.
Along with an appraisal, the professional appraiser can assign discounts for lack of marketability and lack of control. For an FLP, combined discounts for lack of control and marketability can total from 20% to 40%.
The first potential discount that can be taken when the FLP is appraised is the control discount. Since the limited partners have largely abbreviated rights to begin with and lack of any control, their interest in the FLP is discounted to reflect the lack of control that they do not possess. The second discount that can be taken is one for lack of marketability.
- List a legitimate business purpose such as consolidation of family asset management or lowering administrative costs of family assets.
- Do not transfer the donor’s home into the FLP, unless the home is vacated and treated as a rental property.
- Operate the FLP in accordance with legal requirements.
- Do not commingle assets between the partnership and personal assets. First, bank accounts should be in the name of the FLP. Business records, financial and nonfinancial, should be kept separately from personal assets.
- Transfers should conform to a business plan over time, not in contemplation of death.
- Make sure the donor has sufficient personal assets to make a living separate from the FLP.