Family Limited Partnership
What is an FLP?
An FLP is a limited partnership controlled by members of a family; like other limited partnerships, an FLP consists of two types of partners: general and limited. General partners control all management and investment decisions and bear 100% of the liability. Limited partners cannot participate in the management of the FLP and have limited liability. The partnership itself isn't taxable - instead, the owners of a partnership report the partnership's income and deductions on their personal tax return, in proportion to their interests.
Benefits of an FLP
Transferring limited partnership interests to family members reduces the taxable estate of senior family members. The senior family members transfer the value of the asset to their children, removing it from their estates for federal estate tax purposes, while retaining control over the decisions and distributions of the investment. Since the limited partners cannot control investments or distributions, they may be eligible for valuation discounts at the time of transfer.
Transfers of limited partnership interests are also eligible for the annual gift tax exclusion, a powerful tool for reducing income, gift and estate taxes. According to law, the value of limited partnership shares can be discounted when transferred to family members. In addition, because of an FLP's flexibility, the family members who are owners can usually amend the partnership agreement as family circumstances change.
An FLP also protects assets from claims of future creditors and spouses of failed marriages. Creditors may not force cash distributions, vote, or own the interest of a limited partner without the consent of the general partners. And in the event of a divorce, where a limited partner ceases to be a family member, the partnership documents can require a transfer back to the family for fair market value, keeping the asset within the family structure.
By combining investments together into an FLP, a family's investment fees are significantly reduced. Instead of maintaining separate brokerage accounts or trusts for each child, the partnership can hold one brokerage account, and the children or trusts for children can own partnership interests.