A Family Limited Partnership (FLP) is a classic technique to shift income and wealth to future generations. With an FLP, family members pool money to run a business project. Each family member can buy shares for a potential profit.
PARTNERS
FLPs have general partners and limited partners. General partners usually own the largest share of the business and are responsible for day-to-day management tasks. Limited partners have no management responsibilities. Instead, they buy business shares in exchange for dividends, interest, and profits the partnership may produce. Members risk losing their investment or even incurring debt if the business fails.
THE ATTRACTION
FLPs may help preserve a family’s generational and business wealth by allowing for tax-free transfers of assets, real estate, and other wealth.
Gift-Tax Advantages. Using the annual gift-tax exclusion, you might gift FLP interests tax-free to your children and grandchildren. In 2024, this exclusion lets you give up to $18,000 (or $36,000 per married couple) to as many individuals as you choose. This amount is reviewed for inflation increases annually.
Estate-Tax Advantages. Assets in an FLP effectively leave the partners’ estates. So, the partnership’s future returns are generally excluded from estate taxes, benefitting your children, grandchildren, or limited partners. You can set stipulations in your partnership agreement to protect your gifts from being squandered or mismanaged. One strategy is a rule stating that gifted shares can’t be transferred or sold until the beneficiaries reach a certain age. Shares can be transferred to minor beneficiaries through a Uniform Transfers to Minors Act (UTMA) account.
CAVEAT
FLPs and the tax laws that govern them are complex and creating one may entail some expense. Families should consult qualified accountants and tax professionals before establishing an FLP. Most often, setting up an FLP will call for a tax specialist and estate planning attorney, and you may need to call on other professionals associated with helping to support an FLP.