family limited partnership
A family limited partnership ("FLP") is a limited partnership that is formed under state law. The FLP can be an appropriate investment vehicle to house business assets and investment assets such as stock, securities, real estate, limited partnership interests and other investment securities. The FLP will be owned by a general partner and limited partners. The general partner will manage the day to day operations of the FLP, and therefore, control the family business. The children, and/or grandchildren, usually receive limited partnership interests over a period of time through gifts and other techniques.

Although FLP’s have received a tremendous amount of attention from the legal profession over the past decade, they have been used for management of family assets for many years. By titling such assets in the name of a FLP, substantial non-tax and tax advantages can be achieved. The nontax advantages are as follows:

  1. The family will continue to exercise authority and control over the partnership assets since the family will own the corporate general partner. The transfer of a limited partnership interest to a beneficiary rather than transferring individual assets or cash greatly reduces the beneficiary’s ability to sell the gifted asset and pursue investment strategies that are incompatible with the donor’s wishes.

  2. Consolidation of family assets into a FLP will simplify operational costs. With such assets consolidated in a single investment entity, investment fees and costs should be reduced since such assets will not be held in multiple family entities. The net result is an increase in the value of assets available for all beneficiaries. This arrangement can also be used in connection with different trusts for family members, without having to de-consolidate the assets for investment purposes. Such trusts would own a limited partnership interest in lieu of the actual investment assets. This allows for the achievement of overall diversification which might not be readily obtainable for entities with lesser amounts of assets.

  3. A FLP simplifies annual gift-giving since a gift of a family limited partnership interest is easy. You no longer have to split-up assets or choose which child gets which assets since a limited partnership interest gift is a pro rata share of all the assets housed in such FLP. Moreover, gifting of limited partnership interests allows the transfer of wealth to children and grandchildren without reducing the beneficiaries’ initiative. Since the beneficiary can not readily sell the interest for cash to use for his own support, he will not be dissuaded from pursuing his own career and earning a living.

  4. FLP provides protection of family assets from future creditors since a creditor's only recourse is a "charging order" under Florida law against the partnership interest; and therefore, the creditor cannot reach the underlying partnership assets. Further, this also permits a purchase of such interest from the creditor/assignee at a discounted value. Moreover, the use of buy/sell provisions can further restrict ownership to assure that partnership assets stay in the family.

  5. FLP provides protection against failed marriages. An award to a divorced spouse of a limited partnership interest is an award of an illiquid asset. Again, as noted above, this permits a purchase of such interest from the divorced spouse at a discounted value. Moreover, the nature of the partnership interest itself and manner in which it is transferred to a beneficiary makes it less likely that it could be commingled and become part of the divorced spouse’s marital assets. Other assets, when gifted to a beneficiary, may be deemed to have been commingled. The risk would be even greater if a beneficiary resides in or moves to a community property state.

  6. The FLP's investment policy is governed by the business judgment rule and not a fiduciary prudent man rule. The latter rule is a stricter standard. There are many business decisions which may be reasonable but may be construed as violating the prudent man rule. This gives maximum protection to the family members involved in the investment decisions for the FLP's assets.

  7. The limited partnership agreement is a more flexible entity which can be amended, within certain limitations, to take into account changing business and investment criteria provided such amendments are approved by the partners in accordance with the partnership agreement. This is much more favorable than an irrevocable family trust which normally requires court approval of any amendment and is further complicated since the decedent-settlor’s interest must be determined which is generally difficult because the future circumstances were probably not contemplated.

  8. Family disputes can be resolved through the use of arbitration in the context of a limited partnership agreement. In trust proceedings the only recourse would be through the courts which is a much more protracted, expensive and public forum.

  9. A partnership agreement can dissuade beneficiaries from filing frivolous litigation by providing for payment of attorney’s fees and costs by the losing party. This would be more difficult to enforce in a trust agreement.

  10. The use of a partnership structure can avoid the necessity of multiple jurisdictional probate proceedings. It is a much more flexible arrangement than a revocable trust. The interest of the beneficiaries would not be subject to probate proceedings in any jurisdiction other than his domicile in the event of the beneficiary’s death.

The creation of the limited partnership and transfer of the assets will not create any gift tax liability assuming the family limited partnership is properly funded. However, future gifts of limited partnership interests to family members either outright or in trust would be eligible for the annual $13,000 exclusion and potentially for valuation discounts for nonmarketability and minority interests.

The principal tax advantage from this structure is the availability of valuation discounts for the limited partnership interests, since such interests are illiquid and do not represent control of the partnership.

The analysis set forth herein can equally be applied to the use of a limited liability company. However, after the Olmstead v. Federal Trade Commission case, remains uncertain since the Florida Supreme Court held that a court may order a judgment debtor to surrender all right, title, and interest in the debtor's single-member limited liability company organized under Florida law, to satisfy an outstanding judgment. Until such time as this issue is resolved in the Florida legislature it would be best to use a limited partnership or limited liability limited partnership instead of a Florida single member limited liability company.

Please keep in mind that family limited partnerships and limited liability companies have been the subject of much litigation with the IRS as of recent. It is critical that you obtain sophisticated counsel in this area of the tax law to assist you in properly implementing this type of strategy to avoid tax and creditor pitfalls.

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