 | Family Limited Partnerships have become one of the most useful estate planning tools in recent years. Particularly, since transfer tax rates have been shifting in recent years, many families have found Family Limited Partnerships (FLP's) to be the answer to how they can easily transfer property to their heirs, while minimizing gift tax exposure for doing so. But it may soon be a thing of the past. |
Essentially the FLP is usually a holding company divided into General Partners and Limited Partners, each of which has different roles in the company and different management control over the company, but by structuring it as an FLP those distinctions create many advantages including:
- Lower Gift Tax Exposure:
Generally when you give a gift or transfer property to someone else, there is exposure to gift taxes. Currently, people can take advantage of nontaxable transfers of up to $13,000 per person, per year and 5 million dollars of lifetime gift tax exemption. However, next year the lifetime exemption is expected to drop to 1 million. When property is given to others through a FLP, the interest they hold is subject to management restrictions and so, it is not as easily transferrable as it would be if distributed outright. That means the taxable gift is valued at a fraction of what it would normally be, thus paying less gift tax. When you consider that gift taxes are currently at 35% and next year could shoot up to 50%, that adds up to some big savings.
- Removing Property From Your Taxable Estate:
The same concept applies to Estate Taxes. If they don't hit you with gift taxes while you're alive, they will hit you with estate taxes after you're dead- unless the property is not held in your estate. By transferring property to a FLP, you can reduce the value of your taxable estate, thus reducing any potential estate tax liability.
- Asset Protection:
Perhaps one of the greatest benefits of a FLP is the potential asset protection it can provide to family members for their interests. When creditors try to seize FLP assets they can normally only obtain a charging order against the FLP interest, meaning that they can collect or charge when distributions are released. But, since distributions do not have to be released, the charging order can be made ineffective indefinitely if instead reinvested by the FLP.
- Income Tax Benefits:
Another interesting aspect of FLP's is that gains can be distributed among the partners so as to take advantage if lower tax rates. Since not every partner will be in the same tax bracket, distributions can be taxed at each ones bracket according to their gains rather than all one person's bracket.
- Keeping Things In The Family:
Finally, FLP are a great way to ensure that interests in property stay in the family. Through buy sell agreements or rights of first refusal, any interest in property held by the FLP can be left solely to family and may be sold to outside buyers only if everyone in the FLP rejects it. Likewise, if a limited partner of a FLP were to get divorced, the interest in the FLP can be retained by the family rather than lost in the division of marital property. Since distributions in the FLP and provisions are controlled, you can retain say in what happens to property even after gifting it away, where otherwise absent a trust instrument or some other entity you wouldn't.
FLP's can be extremely useful tools. If you think you might be interested in making a Family Limited Partnership part of your legacy, contact us at (801) 477-1570.
- Lower Gift Tax Exposure:
Generally when you give a gift or transfer property to someone else, there is exposure to gift taxes. Currently, people can take advantage of nontaxable transfers of up to $13,000 per person, per year and 5 million dollars of lifetime gift tax exemption. However, next year the lifetime exemption is expected to drop to 1 million. When property is given to others through a FLP, the interest they hold is subject to management restrictions and so, it is not as easily transferrable as it would be if distributed outright. That means the taxable gift is valued at a fraction of what it would normally be, thus paying less gift tax. When you consider that gift taxes are currently at 35% and next year could shoot up to 50%, that adds up to some big savings.
- Removing Property From Your Taxable Estate:
The same concept applies to Estate Taxes. If they don't hit you with gift taxes while you're alive, they will hit you with estate taxes after you're dead- unless the property is not held in your estate. By transferring property to a FLP, you can reduce the value of your taxable estate, thus reducing any potential estate tax liability.
- Asset Protection:
Perhaps one of the greatest benefits of a FLP is the potential asset protection it can provide to family members for their interests. When creditors try to seize FLP assets they can normally only obtain a charging order against the FLP interest, meaning that they can collect or charge when distributions are released. But, since distributions do not have to be released, the charging order can be made ineffective indefinitely if instead reinvested by the FLP.
- Income Tax Benefits:
Another interesting aspect of FLP's is that gains can be distributed among the partners so as to take advantage if lower tax rates. Since not every partner will be in the same tax bracket, distributions can be taxed at each ones bracket according to their gains rather than all one person's bracket.
- Keeping Things In The Family:
Finally, FLP are a great way to ensure that interests in property stay in the family. Through buy sell agreements or rights of first refusal, any interest in property held by the FLP can be left solely to family and may be sold to outside buyers only if everyone in the FLP rejects it. Likewise, if a limited partner of a FLP were to get divorced, the interest in the FLP can be retained by the family rather than lost in the division of marital property. Since distributions in the FLP and provisions are controlled, you can retain say in what happens to property even after gifting it away, where otherwise absent a trust instrument or some other entity you wouldn't.
FLP's can be extremely useful tools. If you think you might be interested in making a Family Limited Partnership part of your legacy, contact us at (801) 477-1570.
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