Features of Family Limited Partnerships
WHAT IS A FAMILY LIMITED PARTNERSHIP?
A family limited partnership (FLP) is a limited partnership in which all the partners are family members or entities created by or owned by family members. A limited partnership is a common business entity that consists of at least one general partner and at least one limited partner. A general partner, who can own as little as one percent of the partnership interests, has the entire right to manage the business and can be held personally liable for partnership debts. A limited partner has no right to participate in managing the partnership business and has limited liability for partnership debts.
WHO ARE THE GENERAL PARTNERS OF AN FLP?
WHY WOULD ANYONE WANT TO CREATE A CORPORATION, LIMITED LIABILITY COMPANY OR MANAGEMENT TRUST TO BE AN FLP GENERAL PARTNER?
WHO ARE THE LIMITED PARTNERS?
The limited partners are often children and grandchildren of the general partners, irrevocable trusts created by the senior family members for the benefit of junior family members, or revocable living trusts created by senior family members as part of their own estate planning.
WHAT ASSETS CAN AND CANNOT BE CONTRIBUTED TO AN FLP?
IRC section 1244 stock
Professional corporation or association stock
Potential liability-producing assets
Assets with debt in excess of adjusted basis
HOW CAN I CAN USE AN FLP FOR GIVING PROPERTY TO MY CHILDREN?
WHO APPRAISES THE PARTNERSHIP INTERESTS FOR PURPOSES OF THE DISCOUNT?
A qualified appraiser must appraise the value of the partnership assets and then the value of the limited partnership interests in terms of restrictions under state law and in the partnership agreement. These appraisals, while related, are not the same. The former involves the value of the assets held in the FLP, and the latter involves the value of the ownership interests in the FLP as an entity.
IS THE IRS LIKELY TO CHALLENGE AN FLP?
The IRS does not like family limited partnerships when used to obtain large discounts in the value of an estate, thereby saving estate and gift taxes that would otherwise be due. The IRS admits that valuation discounts of FLPs are legitimate, but it still challenges them in many situations. A challenge is most likely if the FLP is created just before death. Forming an FLP two days before death or when the parent is incapacitated invites the IRS to attack the partnership as solely a scheme for avoiding tax.
MIGHT THE LAWS WHICH FAVOR FLPs CHANGE IN THE FUTURE?
Since the IRS does not like the substantial estate and gift tax savings realized through the use of FLPs, it is possible that legislation in the future could limit the estate tax savings. However, you must remember that there are many advantages to the FLP, and it is unlikely that all the advantages will be taken away in one fell swoop. For instance, the creditor protection afforded by FLPs is created by state law and cannot be easily affected by federal law changes. Also, the ability to give shares of the partnership to children and relatives without giving up control of the assets within would survive any change in the law on valuation of partnerships for gift tax purposes.