March 18, 2015
Authored by: Stacie J. Rottenstreich and Joel Levin
A family limited partnership (“FLP”) can be a useful estate planning tool. A FLP a limited partnership where family members own the limited partnership interests and under certain circumstances may be members or owners in the entity which acts as general partner of the FLP as well. Various family members will invest in the FLP and take back interests proportionate to the capital invested. The limited partners of the FLP are not responsible for making any decisions about underlying FLP assets. They receive distributions or make capital contributions based solely on the decision of the general partner.
A FLP can be useful to a family in many ways and may have tax benefits. You might want to give some of your limited partnership interest in a FLP to a younger generation member. These gifts might use up some of your lifetime exclusion and may, if structured properly, be a candidate for annual gifting. If you are contemplating making gifts of your limited partnership interests in a FLP, you should not be a participant or owner in the entity which is the general partner of the FLP. In such circumstances, you should also not be making any distribution or dissolution decisions regarding the FLP.
Another important feature of a FLP is asset protection from creditors. If you are sued and a plaintiff gets a judgment against you, the plaintiff can seize property owned by you. However, the creditor cannot get to the assets held by a FLP. Whatever property and cash is held by the FLP is not owned by you directly, and thus cannot be used to satisfy the debt against you.
To achieve the benefits that arise with the formation of a FLP, the formalities inherent in a FLP must be observed. Some of the formalities are as follows:
(1) The FLP should have a bona fide business purpose.
(2) The assets in a FLP must owned by the FLP.
(3) The partners should not be treating them as if they are individually owned.
(4) The financial and business records of the FLP should be carefully maintained.
(5) Personal funds should not be commingled with FLP funds.
(6) The capital account of all partners should be maintained properly.
(7) Distributions from the FLP should be made in proportion to the partners’ ownership interests, not just to a partner who may need or want funds.
If a FLP is properly documented and structured, it can be a useful planning tool. Please see to it that you observe the formalities inherent in the structure. Failing to do so, will likely undermine any tax or creditor protection objectives you are striving to achieve.