JANUARY 21, 2000


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Estate Talk

Why Create a Family Limited Partnership?

Family limited partnerships (FLPs) have many benefits, both economic and otherwise, and people create them for various reasons. Most taxpayers who create FLPs have one or more of the following goals in mind:

  1. Shifting the value of their assets to their heirs while reducing transfer taxation;
  2. Maintaining control of their assets even after those assets have been gifted to heirs; and
  3. Protecting their assets from creditors.
For example: suppose a husband and wife place $2,000,000 worth of assets (including real estate, business interests, stocks, bonds, and other investments) into a FLP. This FLP then owns all the assets, and the couple retains control by appointing themselves as general partners. While they continue to enjoy the use of and income from the assets, the husband and wife may now begin a gifting program granting their heirs partnership interests in the FLP. These interests cannot be transferred and do not carry voting rights, so the heirs cannot interfere with the couple’s control of the partnership assets in any way. But eventually, usually upon the spouses’ deaths, the heirs will inherit control of the assets.

However, when the interests are gifted, they are usually discounted for lack of marketability and lack of control. This can reduce the value of the gift greatly, usually by 20% to even 60%. Furthermore, both spouses can make gifts of discounted partnership interests that qualify for the annual gift tax exclusion. So, suppose the couple in this example has three children and seven grandchildren—ten heirs total. Both husband and wife could gift $100,000 per year ($10,000 per heir) without paying any gift or estate taxes.

Depending on the amount of the valuation discounts for lack of control and marketability, the couple could have their entire estate transferred to their heirs in a matter of several years without incurring any transfer tax liability, all-the-while continuing to enjoy the use of their assets for life.

Also, the FLP assets are protected from the heirs’ creditors. Should any of the heirs declare bankruptcy or be put into receivership, the creditors are severely limited. They cannot order liquidation of the FLP or the disposition of assets or a partition of any part of the assets. These limitations, as well as other factors, often facilitate a favorable settlement with creditors.