| General Structure of a Family Limited Partnership | | | | junior generation members, bringing the junior |
| (FLP) | | | | generation into the partnership. |
| It has become increasingly important for people | | | | If any of the donees are minors or are in need of |
| with assets to understand what the FLP is and | | | | spendthrift protection from creditors, trusts may |
| why the use of FLP's have become so | | | | be used to hold their interests in the partnership. |
| widespread. | | | | This structure allows the parents, as general |
| A Family Limited Partnership is a Limited | | | | partners, to transfer interests in the limited |
| Partnership who's Limited Partners are family | | | | partnership to the children as well as control the |
| members. The term "Family Limited Partnership" | | | | management and investment decisions of the |
| has no technical reference or definition in the | | | | partnership. |
| Internal Revenue Code. | | | | Term |
| There are two basic reasons for this widespread | | | | The FLP is normally structured as a fixed term |
| use. | | | | partnership. A limited partner generally has a right |
| 1) The FLP's popularity is a result of the originator | | | | to withdraw from the partnership, and to receive |
| or donor's ability to transfer assets down to his | | | | the fair value of the limited partner's interest, by |
| descendents at a lower transfer tax cost than | | | | giving six months notice. However, that provision |
| would be otherwise incurred with a direct transfer | | | | does not apply if the agreement specifies "the |
| of the assets to descendants. | | | | time or the events upon the happening of which a |
| 2) The donor retains control of the assets by | | | | limited partner may withdraw or a definite time |
| retaining control of the general partner. | | | | for the dissolution and winding up of the limited |
| Additionally, the FLP is a very attractive | | | | partnership." For instance, the limited partnership |
| estate-planning tool. There are ways to eliminate | | | | may provide that it is to last for thirty years. In |
| probate courts and gift taxes and the FLP is | | | | that case, under appropriate state law principles, |
| normally a good answer for passing down assets. | | | | limited partners would not have the right to |
| One thing that should be noted is that the FLP | | | | withdraw prior to the end of the thirty year fixed |
| should not contain all of the estate assets, but | | | | term. |
| instead, only ten to forty percent of the estate | | | | Management |
| assets. | | | | General Partners have all management rights with |
| Future generations can gain access to the passed | | | | respect to the limited partnership. Limited partners |
| on assets by reducing their inheritance taxes and | | | | are excluded from the management of the |
| liability by being responsible only for the limited | | | | partnership except in respect to certain limited |
| capacity of their interest. | | | | matters designated in the Revised Uniform |
| 1) The parents own the various assets. Although | | | | Limited Partnership Act (RULPA). If a limited |
| the parents can serve as general partners in their | | | | partner takes part in the control of the |
| individual capacities for creditor protection | | | | partnership, he may lose his limited liability status |
| purposes they establish and capitalize an entity to | | | | with respect to a person who transacts business |
| act as general partner of the FLP. | | | | with the partnership reasonably believing that the |
| The Partnership Agreement limits transferability of | | | | limited partner was a general partner. |
| limited partnership units and the owners of these | | | | Allocation of Income and Gain |
| units do not exercise management control over | | | | Income and gain are allocated among the various |
| the Partnership. As a result, the value of each unit | | | | partners in accordance with their percentage |
| is reduced or "discounted" to a value less than the | | | | interests in the partnership. The Internal Revenue |
| actual share value of the Partnership assets. | | | | Code contains detailed rules that must be satisfied |
| 2) This entity is usually an S Corporation or an | | | | in order for allocations of income and gain to be |
| LLC because these entities are taxed as "pass | | | | respected. There are special rules under Section |
| through" entities. The entity and the parents (and | | | | 704(e) of the Internal Revenue Code applying to |
| the children too, if they desire) in the beginning | | | | family partnerships (although it is typically easy to |
| form the limited partnership with the general | | | | structure the partnership in order to satisfy the |
| partner holding a 1% interest and the parents | | | | special family partnership requirements). |
| owning the remaining 99% interest in the | | | | Shifting and Gifting |
| partnership. In exchange for its interest in the | | | | Simply put the objective is to shift rather than |
| partnership, the general partner contributes 1% of | | | | gift in order to take advantage of what is known |
| the capital and the parents then contribute the | | | | as "valuation discounts." Valuation discounts allow |
| remaining assets to the partnership. The parents | | | | the asset holder to leverage the annual gift tax |
| then assign their limited partnership interests to | | | | exclusion and unified credit, allowing parents to |
| their children either immediately or over time, | | | | transfer more assets to the junior generation |
| depending upon which would produce the lowest | | | | with considerably reduced gift and estate tax |
| overall transfer tax cost. | | | | liabilities. Another benefit is that the Family Limited |
| Typically, the parents make a nontaxable transfer | | | | Partnership allows the parents to shift a portion of |
| of assets to the partnership in exchange for | | | | income earned by their closely held business to |
| partnership units. The partners then begin the | | | | other family members, while at the same time |
| systematic gifting of limited partnership units to | | | | retaining control over that business. |