New Podcast Episode: How to Use AI to Future-Proof Your Business with Ed Morrissey Watch or Listen Now

December 22, 2020

Gifting Personal or Business Assets to Children Using a Family Limited Partnership

Passing along a business or wealth to the next generation is a goal of many individuals. There are several ways to transfer personal assets or business interests to your children or grandchildren. One often-overlooked strategy is utilizing a Family Limited Partnership to gift these assets. Below we dive into the basics and benefits of a Family Limited Partnership.

What is a Family Limited Partnership?

A Family Limited Partnership (FLP) is a limited partnership where a family of two or more individuals pool a portion of their personal or business assets together under one limited partnership. FLPs are recommended for individuals seeking to transfer these assets to their children or grandchildren while maintaining partial control, educating their heirs, and potentially saving on taxes in the process.

Similar to a traditional limited partnership, a family limited partnership is set up with general partner(s) and limited partner(s). In a FLP the general partner(s) is the family member(s) who hold the assets, typically the senior-generation. The remaining family members, typically the children or grandchildren, are receiving the limited partnership interest as a gift.  In some scenarios the limited partnership interest may be sold to at a discounted price rather than gifted.

What are the benefits of using a Family Limited Partnership?

Asset Control

Any individual who has worked hard building their wealth or business may be reluctant to the idea of giving up control. This is where the structure of the partnership is crucial.  The general partner(s) retain control over the managing of the assets. This allows them to educate their heirs on how the business is ran while simultaneously having the control to make the necessary decisions.  With this level of control, senior generation family member can also use the FLP to disperse assets to the limited partners utilizing the annual and lifetime gift tax exclusions. The structure also allows interest or ownership of an assets to be divided to family members without fractionalizing titles of the assets.

Tax Savings

A popular benefit of an FLP is the potential savings from estate and gift taxes. This has also put FLPs on the IRS radar for scrutiny.  Since limited partners maintain a lack of control in the FLP, a limited partner can receive a gift of interest in the FLP or buy interest in the FLP at a discount from the general partner. Any interest gifted or transferred to a limited partner can be utilized against the annual gift tax exclusion, which is currently set as $15,000 per recipient for 2020 and 2021. Once a family member has limited interest in an FLP, any earnings from the assets in the FLP are taxed at his/her income tax bracket.

Protection from Creditors

An FLP offers a great deal of safety in a situation where a creditor needs payment from a family member in the partnership. The structure of a FLP makes it to where the creditor does not have any control or access to the underlying property within the partnership. Instead, the creditor can only receive payment from the distributions of the partner who personally holds the debt.

Anders can work with you to decide if a Family Limited Partnership is best for your situation. Contact an Anders advisor today to discuss the many benefits of forming a Family Limited Partnership or learn more about Anders Family Wealth and Estate Planning services.

All Insights

Keep up with Anders

Want to keep up with all the latest insights from Anders? Subscribe and receive the information that matters to you.