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When your clients are in need of savvy estate planning strategies, you might consider helping them set up a Family Limited Partnership (FLP) as a tactic to protect their assets and avert liability.

If your specialty is tax and estate planning, you already know the advantages of setting up a FLP. You may want to partner with an accountant who is well-versed in setting up these partnerships and has worked with obtaining valuations in a FLP setting. Be sure that the valuation report includes: 1) a statement of purpose; 2) a detailed discussion of the valuation method used; 3) consistency and logic; and 4) supporting arguments for any discounts taken.

Even if you don’t specialize in estate planning, knowing the ins and outs of FLPs will add to your arsenal of tools to better serve your clients.

Why FLP?
A FLP is essentially the same as a traditional limited partnership, with the distinguishing factor being that the partners are members of the same family. Family Limited Partnerships can provide a number of advantages for your clients, including:

• Income tax savings on an annual basis
• Significant savings on future estate taxes
• Protection of assets from lawsuits and creditors
• The ability to retain total control over assets

FLPs are attractive for families because they can allow parents to significantly discount the value of gifts to their children. In the typical scenario, initially, the parents contribute various assets into the partnership in exchange for both General Partnership (GP) and Limited Partnership (LP) interests, with their children assigned as Limited Partners. Each year, the parents can gift limited partnership interests on a discounted basis to the children, making use of either the $11,000 annual gift tax exclusion or the $1,000,000 lifetime exclusion. As a result, the parents can gift significant portions of their assets through transfers of Limited Partnership interests.

With respect to the GP interest, which can be as little as 1%, based on recent tax court cases, a GP can no longer be the parent and continue to retain control over the Partnership assets. If he does, then the full value of the gifts that were made will be fully includible in the GP’s estate at the fair market value on the date of death. The GP interest, therefore, will need to be transferred to a family member(s) who are trustworthy and can manage the Partnership operations.

FLPs also create a sturdy shield of protection from lawsuits and creditors. Because the FLP prohibits the transfer of the Partnership's interests to entities outside the family, creditors may not obtain an actual interest in the Partnership. They can, however, attach the income and distribution rights in the partners’ interest in the FLP, but the General Partner can choose not to make distributions, which would put the kibosh on the ability of the creditor to use the FLP as an avenue to obtain assets from the Partnership. Furthermore, the creditor would still be responsible for paying taxes on its share of the FLP income – and they certainly wouldn’t want to pay tax on income they aren’t receiving. Bottom line: the FLP throws up a significant block against creditors.

Be sure to team with a knowledgeable accountant as you advise your clients about Family Limited Partnerships. While the advantages are significant, FLPs are not for everyone, and the costs and risks must also be taken into consideration, along with the benefits.

To learn more about both the advantages and complexities of Family Limited Partnerships, click here. www.usalaw.com/family.html

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