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Family Limited Partnership: Estate Freeze Technique

August 23, 2011

Family Limited Partnership: Estate Freeze Technique

 

Definition 

A family limited partnership (FLP) is a limited partnership created under and governed by state law, and of which two or more family members serve as limited and/or general partners. It is a powerful and currently popular estate planning tool that (1) reduces income and transfer taxes, (2) permits you to distribute business assets to your heirs while retaining control of the business, (3) ensures continued family ownership of the business, and (4) provides liability protection to the limited partners.

Prerequisites 

  • Interests must be distributed to family members only
  • Distributions must be made through bona fide sale or gift transactions
  • Reasonable compensation must be paid to partners who actually work for the FLP
  • FLP income distributed to a partner can’t be disproportionately greater than the capital contributed by that partner
  • FLP must own income-producing assets
  • Nonbusiness assets should not be transferred to the FLP
  • All formalities of existence must be observed

Key Strengths 

  • Shifts income among family members
  • May help minimize or avoid income and transfer taxes
  • Allows you to maintain control of the business
  • Provides benefits to children who do not participate in the business
  • Protects assets
  • Offers flexibility
  • Consolidates and simplifies ownership of assets
  • Avoids probate
  • May avoid ancillary probate
  • Maintains your privacy
  • Ensures continuity of business operations

Key Tradeoffs 

  • FLP is a relatively complex form of business entity
  • May be subject to generation-skipping transfer taxes and/or gift taxes
  • Can be costly to create
  • May create a state gift tax problem in some community property states

Variations from State to State 

  • Required filings and fees vary from state to state
  • Formalities of existence vary from state to state
  • State laws governing FLPs vary from state to state
  • FLP income that is spent for the benefit of both spouses may be treated as a taxable gift in some community property states

How Is It Implemented? 

  • Hire a competent, experienced attorney to draft and file all required documentation
  • Hire an appraiser to appropriately value assets, FLP interests, and determine applicable discounts
  • Execute a limited partnership agreement
  • File all required documents with the appropriate state agency
  • Obtain all required permits, licenses, and registrations
  • Obtain a federal taxpayer ID number
  • Transfer title to the contributed assets to the FLP
  • Amend any existing contracts and documents relating to the assets contributed to reflect the FLP as the real party in interest
  • Observe all formalities of existence

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com,  access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

The Retirement Group is a Registered Investment Advisor not affiliated with  FSC Securities and may be reached at www.theretirementgroup.com.

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