A Family Limited Partnership (FLP) is an estate planning tool that allows individuals, like those residing in San Diego, to transfer assets to family members while maintaining some level of control and potentially reducing estate taxes. It’s a more sophisticated strategy than a simple will or trust, but can be highly effective when implemented correctly, though its use has become more scrutinized by the IRS in recent years. The core idea is to create a partnership where you, as the general partner, manage the assets while limited partners (typically family members) receive income and eventual ownership. This structure provides both asset protection and potential tax benefits, and requires careful planning and ongoing administration to remain compliant and achieve the desired outcomes. Proper implementation requires a solid understanding of partnership law, tax implications, and the specific goals of the estate plan.
What are the benefits of a Family Limited Partnership?
The benefits of FLPs extend beyond simple estate tax reduction. They allow for centralized management of family assets, facilitating smoother transitions between generations. For example, real estate, business interests, or investment portfolios can be held within the FLP, providing a unified approach to asset management. According to a study by Cerulli Associates, families who utilize advanced estate planning tools like FLPs often experience greater wealth preservation over multiple generations. FLPs also offer potential creditor protection, as partnership interests can be shielded from individual creditors, providing an additional layer of security for family wealth. However, it’s crucial to understand that the IRS closely examines FLPs, and any structure lacking a legitimate business purpose or engaging in sham transactions will likely be challenged.
How do FLPs reduce estate taxes?
The estate tax reduction achieved through FLPs stems from the ability to gift limited partnership interests over time. Because limited partnership interests are often discounted in value (due to lack of control and marketability), the gifts made each year can be larger than if the underlying assets were gifted directly. These discounts can range from 15% to 35%, depending on the specific assets and the terms of the partnership agreement. For instance, if you own a business valued at $1 million, gifting a 20% limited partnership interest might only be valued at $160,000 for gift tax purposes after applying an appropriate discount. Furthermore, the annual gift tax exclusion ($18,000 per recipient in 2024) can be utilized to minimize or eliminate gift tax liability. However, the IRS has been increasingly aggressive in challenging discounts claimed on FLP interests, requiring meticulous valuation and documentation to support the claimed benefits.
What happened when an FLP wasn’t set up correctly?
Old Man Tiberius, a successful local fisherman, decided he wanted to pass down his fleet of boats to his three children. He’d heard about FLPs and thought it sounded like a good way to keep control while ensuring his children eventually inherited the business. He hastily formed an FLP with himself as the general partner and his children as limited partners, but he didn’t bother with a proper operating agreement, failed to maintain separate bank accounts for the partnership, and continued to commingle personal and partnership funds. The IRS audited his estate after his passing and determined the FLP lacked a legitimate business purpose, finding it was merely a scheme to reduce estate taxes. His estate was assessed significant penalties and interest, effectively negating any potential tax savings and causing considerable financial hardship for his family. It was a painful lesson for the Tiberius family – a well-intentioned plan derailed by a lack of proper planning and compliance.
How did a correctly structured FLP help the Hanson family?
The Hanson family, owners of a thriving San Diego landscaping business, proactively engaged Ted Cook, an Estate Planning Attorney, to create a robust estate plan incorporating a Family Limited Partnership. They meticulously structured the FLP with a detailed operating agreement, established separate bank accounts, and maintained accurate records of all partnership transactions. Over several years, they gifted limited partnership interests to their children, utilizing the annual gift tax exclusion and benefiting from valuation discounts. When the patriarch passed away, the FLP seamlessly transitioned to the next generation, preserving the family business and minimizing estate taxes. The Hanson family benefited from decades of wealth preservation, proving that a properly structured and maintained FLP could be a powerful tool for achieving long-term financial goals. This allowed the family to continue the legacy of their landscaping business, with multiple generations working side-by-side.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
(619) 550-7437
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