Family Limited Partnership
The Estate Planning lawyers at the Elder & Disability Law Center provide comprehensive estate planning advice and legal services to individuals and families in the Washington, D.C., area, Maryland, and Virginia. Please contact us for a consultation a family limited partnership or any other estate planning option.
A family limited partnership (FLP) is an effective estate planning tool that can be used to maintain control over your assets during your lifetime, limit the impact of estate taxes on those assets upon your death, and reduce the ability of creditors to reach the assets.
A FLP is useful for families who have business assets that they wish to own in common, particularly if some family members want to pass on those assets to other family members. Generally, the FLP consists of one or more general partners and one or more limited partners. The general partners (typically the parents) are responsible for managing partnership affairs while the limited partners (typically the children) have no management rights. The general partners transfer assets into the partnership, then gift minority interests in the FLP to their children, who become limited partners. The limited partnership shares will be exempt from gift tax if they are worth $12,000 or less (or $24,000 or less if the general partners are a married couple). The general partners maintain indirect ownership over a portion of the assets through the FLP. If you have assets that you would like to pass on to your children, while still controlling the assets and limiting their value for estate tax purposes, an FLP is something you should discuss with your Estate Planning attorney.
The FLP results in the de-valuing of assets for estate tax purposes. Assets are valued for gift and estate tax purposes at their fair market value, or what a willing buyer would pay a willing seller for those assets. FLPs typically have restrictions on their transferability and since the assets are fractionalized into partnership units, their value is less overall. This devaluation - up to 50% - can result in reduced estate tax liability when the general partner dies. Further, the law provides that a creditor of a partner cannot reach the assets of the partnership to satisfy an obligation of the partner since it is the partnership as an entity, not the partner individually, that now owns the asset. The FLP can insulate assets from outside interference, transfer them to family members, de-value them for estate tax purposes and allow you to retain control of them all at the same time.
The types of assets that go into an FLP are those that require some type of management so that the FLP has legitimacy as a business entity. The FLP may own closely-held businesses (other than corporations that have made an election to be taxed as an "S" Corporation), real estate, marketable securities or almost any other investment asset. Homes, or other personal assets are normally not suitable for a FLP. An experienced Estate Planning attorney can help you determine if a FLP is the most appropriate way to manage your estate assets.
10 Steps to Creating an FLP:
- Name the partnership – Call the FLP an "investment" or "management" partnership, rather than a "family" partnership to avoid calling attention to the fact that you are creating an FLP.
- Consider the state of formation and the laws that will apply to your partnership.
- File a certificate of limited partnership.
- Obtain a taxpayer identification number.
- Sign a partnership agreement.
- Fund the partnership with selected assets.
- Open a bank account.
- File income tax returns.
- Make distributions.
- Respect the entity by conducting a formal, annual partner meeting and documenting actions taken or authorized.
The FLP can be an effective estate planning tool. It will allow you to maintain control over your assets right now, while reducing estate tax liability on your assets and transferring those assets to your children. Consulting with an experienced Estate Planning lawyer on planning for the Medicaid application process – and preventing being denied Medicaid for long-term care – is the first step in planning for your family's future. Contact the Elder & Disability Law Center for a consultation.