In the face of the complexities of business owners, families and taxes, many have found comfort in the concept of the family limited partnership (FLP). A family limited partnership is an agreement between related parties to transfer ownership of financial and/or business assets to one entity. This “partnership” allows those involved to manage their business holdings more effectively while taking advantage of the many tax incentives the FLP structure provides.
Advantages of a Family Limited Partnership
One of the main advantages of a family limited partnership is that it provides families with a means to transfer assets while minimizing gift and estate taxes. Aside from the tax savings, FLPs also let family members split the responsibilities of managing the assets and give members the ability to keep their ownership interests in a business after one partner passes away.
Another great feature of FLPs is that they allow anyone listed as a partner to obtain financing for the partnership’s holdings without having to obtain a loan from a third party. This allows the family to gain control of the assets without taking on additional debt.
FLP Structures and Requirements
An FLP operates just like a typical partnership by assigning each partner a percentage of ownership in the agreement. The partners then share the profits and liabilities of the partnership based on their respective percentages. While the structure of the FLP may vary depending on the needs of the family, some common features typically include:
- A written partnership agreement that outlines each partner’s interests and responsibilities
- An income distribution agreement that outlines how profits and losses will be shared
- Partners must contribute capital to the FLP, which will result in tax benefits
- The ongoing management of the FLP must follow certain legal requirements
Creating and Maintaining a Family Limited Partnership
Creating and maintaining a family limited partnership may seem like a daunting task. Fortunately, the process doesn’t have to be overly complicated – speaking with a qualified attorney will help the family ensure that all of their legal and financial needs are being met.
Additionally, each partner should remain diligent in keeping records and filing the necessary paperwork with the IRS. Whether it be a state-required registration, annual filing fees or details about the FLP’s income and other documents, partners should stay compliant with the law in order to successfully maintain the FLP.
Conclusion
Family limited partnerships offer many advantages to families and businesses alike. They enable families to transfer assets while minimizing tax liabilities, protect the family’s ownership interest, provide access to financing without taking on additional debt, and are relatively simple to set up and manage. By understanding the basics of an FLP and working with qualified legal and financial professionals, families can take advantage of this powerful tool and protect the legacy of their business holdings.