Family Limited Partnerships

A Family Limited Partnership is an entity like a corporation, consisting of two or more family members who carry on a family business, farms, real estate or other business ventures. The Family Limited Partnership is used to protect assets and keep them in the family. The Family Limited Partnership with one or more family members being the General Partner is a very popular vehicle for holding family wealth in this country. Like all partnerships, they must be created under the statutory rules and filed with the Secretary of State.

Who owns a Family Limited Partnership?

There are two types of partners within the entity. General Partners have a percentage of ownership and control and manage the partnership. They make all business decisions. They determine when and how much of the entity that is to be distributed to the Limited Partners. Limited Partners are passive. They have a percentage of ownership but have no say in how the partnership is managed. A Limited Partner should not incur any personal liability for an activity of the partnership. Losses and profits are allocated among the partnership but no income is distributed unless the General Partner decides to distribute income to the Limited Partner.

What is the Purpose of Creating a Family Limited Partnership?

The traditional purpose has been to divide investment income with children in lower income tax brackets and increase the family's net spendable income. They are used for long range estate planning where the partnership allows the senior family members to contribute assets to the partnership and retain control over the underlying assets while transferring wealth to younger generations by use of the annual gift exclusion to gift away limited partner shares to their families and heirs.

Do You Need a Legitimate Business Interest to Create a Family Limited Partnership?

Yes! There must be a legitimate business purposed, such as managing a small business, rental property investments or even a portfolio of family investments.

Why is a Family Limited Partnership a preferred vehicle for Intra-Family Ownership and Gifting?

• Controlled Distributions- the General Partner determines when to distribute shares (units) of the partnership, Income and losses to the limited partners.
• Restrictions- Restrictions are placed on the Limited Partners ability to transfer their ownership interest.
• Valuation Discounts- Gifts of partnership interest can qualify for the $12,000 per year annual exclusion if structured properly. Discounts can be used in calculating the value of interest given to family members as Limited Partners.
• Credit Protection- A Limited Partner's creditor cannot directly levy upon Partnership assets and cannot take over a Limited Partners interest in a Partnership.
• Flexibility- the Family Limited Partnership may be amended or terminated if all of the members agree. It can be a very flexible entity.

How is a Family Limited Partnership Taxed?

A Family Limited Partnership is typically taxed whereby all Income and Deductions flow to the partners pro rated based upon their partnership interest. This can be altered by agreement. The partnership must file tax returns with IRS and distribute K-1's to the individual partners so that their share of incomes and deductions of the partnership can be shown on their individual 1040's. There is no tax imposed on the Family Limited Partnership and there is no tax to be paid when assets are conveyed from the entity to the limited partners.

Is the Family Limited Partnership right for my Family Interest?

A Family Limited Partnership is an excellent way to remove large amounts of family business assets from your estate while still retaining control of operations and assets. The business assets can be gifted to your children and grandchildren as you determine using the $11,000 per year gift exclusion over an extended period of time, or by utilizing a lump sum credit against your annual lifetime exclusion.