What exactly is a family-limited partnership? And why should you set one up? Here’s everything you need to know about family limited partnerships, including the legal requirements and benefits of forming one and how they can help your business and your family members avoid hefty estate taxes after your death.
What Is A Family Limited Partnership?
A family limited partnership is, in essence, a legal entity that protects your assets while also shielding them from future business liabilities. In other words, if you own an S Corporation or other small business and want to protect it from creditors and lawsuits, setting up an FLP is one way to do so. (It’s also important to keep in mind that some states may not allow for such protection.) There are multiple benefits of establishing an FLP. For example, when you own stock directly in a company rather than via a trust or corporation (the most common), you’re personally liable for any debts incurred by your company. That means creditors could come after your personal property if they could not recover their debt—not ideal if you own expensive real estate or valuable art! However, with an FLP, you can set up what’s called a blocker corporation. This type of company acts as a buffer between your main business and yourself, making it harder for creditors to go after your personal property. Note: Before establishing an FLP with another person or family member, understand all associated tax implications. You’ll need to pay taxes on all income generated by the LLC regardless of whether those funds are distributed among partners each year. However, if you fail to pay these taxes on time and the whole, it can result in hefty penalties and interest charges. Also, note that many states require certain formalities to be met before creating an LLC—for instance, filing articles of organization with state authorities within a certain period following formation.
Why Should I Set One Up?
A family-limited partnership is an effective way to build wealth for your children and grandchildren. Using a limited partnership, you can ensure that your assets will transfer from one generation to another without additional taxation. The current estate tax exemption makes planning for death considerably more accessible than it used to be. With proper planning, you can leave $11 million free of federal estate taxes. When you set up an LLC, you pay zero taxes on profits as long as they remain in the company. If a partner withdraws money or sells his stake, he is subject to tax again. To avoid paying unnecessary taxes, consider setting up an LLC right now instead of waiting until after creating your estate plan. This will help you manage your cash flow more effectively and keep more money within your family over time. Why Should I Choose a Family Limited Partnership Over Other Options?: It might seem counterintuitive to use a legal entity when your goal is keeping things simple. However, there are some key advantages of creating an LLC before you draw up your estate plan:
- An LLC offers more flexibility than other types of entities like corporations.
- It provides better protection against creditors.
- It allows for greater control over ownership.
- Partners can hold multiple interests.
- You can set different terms for each partner.
The most significant advantage is that all partners have equal rights and privileges under the law regardless of how much money they have.
How Do I Get Started?
Unfortunately, you can’t just sign up for FLP online. In most cases, an attorney must set it up for you. This is to prevent the fraudulent use of FLPs to launder money or shield it from creditors. If you don’t have an attorney in mind, look at local business and tax professionals regularly handling these issues. They will help ensure everything is done correctly and by state laws. A family limited partnership (FLP) is a legal entity that allows multiple people to work together on a business without worrying about any potential liability issues that might arise should something go wrong. For example, if Bob and his sister open up a bakery as partners, but they disagree on how things should be run down the road, they could face personal liability problems. If one of them decides to sue another partner, it would be straightforward for creditors to go after their assets. However, by creating an FLP instead of operating as individual partners, Bob and his sister are protected against such scenarios since each partner has limited liability when dealing with other investors in their family limited partnership.
What Are Some Disadvantages Of A FLP?
While most folks set up family-limited partnerships for tax advantages, you should be aware there are some disadvantages to setting one up. For starters, you can’t just set one up whenever and wherever: you have to do it in one of seven states (Delaware, Iowa, Montana, New Mexico, Oklahoma, South Dakota or Wyoming) or get permission from a special court created for these agreements (the U.S. Tax Court). Second, an FLP is an irrevocable agreement—you can’t make changes later on without getting permission from every other partner. Thirdly and most importantly: your assets will be out of your control. If something happens to you, any legal decisions that need to be made about your purchases won’t be made by you; they’ll have to go through probate court. This means that things could take longer than expected and that there could be unexpected costs involved. However, if what you want is simply a way to protect yourself against estate taxes—which would apply even if no probate was required—an FLP might work well for you. It’s worth looking into!
Some people don’t like FLPs because you can’t change them once you create them. You can change how much money comes in and goes out of it, as long as all parties agree to those changes; however, if there are disagreements, everything needs to go back through probate court. And while they may seem like more trouble than they’re worth at first glance, consider that creating an estate plan with trust and power of attorney gets around many problems associated with wills (things being contested after death because they weren’t written enough or due to lack of witnesses), while still allowing someone else to have final say over who gets what when you pass away.
How Do I Decide How Much Money To Put Into The LLC?
If you are using an LLC to protect your assets, it’s essential to consider how much money you will put into it. An LLC allows for flexibility in how much capital is contributed to each entity by each partner. In other words, there is no minimum or maximum amount that each member must contribute. There are two types of contributions: cash and property. You can make cash contributions or property contributions in exchange for your ownership interest in an LLC. You cannot contribute services; they will be considered wages and subject to payroll taxes if you do. Also, keep in mind that when contributing, any debt owed on property used as part of the contribution must be satisfied before it can be used toward meeting your investment requirement. For example, if you own a car worth $10,000 but owe $5,000 on it, only $5,000 worth of value may be applied to your investment requirement. Once all partners have made their initial investments into an LLC (cash or property), additional assets (money or property) may not be made unless all partners agree unanimously. Keep in mind that once an LLC has been formed, there are very few ways to increase your percentage of ownership. The most common method is through a buy-sell agreement that states what happens should one partner wish to sell their interest or pass away. It is also possible for a new investor to purchase another’s interest at the fair market value provided unanimous consent from all existing members is obtained first. Such changes should be documented with written agreements between current members and potential investors in either case.
What Is A Good Amount For My Family Limited Partnership Foundation?
Family-limited partnerships are typically set up with $50,000 foundations. This is what most accountants advise their clients. However, if you do not have much money to put into your FLP, $50,000 can be prohibitively high. You may want to consider putting less than $50,000 in and allowing your children or other family members to help by contributing a small amount at inception. Then as time goes on and your wealth grows over time, you can increase these contributions without having to disrupt your estate planning schedule too much. This will ensure that one generation does not have an unfair advantage over another in terms of how many dollars each contributes to any future disbursements from your FLP. There are two ways to set up a foundation: (1) You can divide it equally among all beneficiaries, which means that every beneficiary receives equal shares in both value and number of units. (2) Alternatively, you can allow your beneficiaries to decide how they would like their share distributed among them. This requires more coordination between beneficiaries but allows them greater flexibility when determining who gets what. It’s always important to consult with your accountant before deciding on an appropriate foundation amount for your FLP. They will provide advice based on your specific situation, including the age and circumstances of everyone involved, potential inheritance tax liabilities or charitable donations which might offset potential benefits associated with using an FLP, etc.
What Are Some Good Reasons For Setting Up A Family Limited Partnership?
A significant reason why FLPs are so popular is that they help protect estate planning documents from creditor claims. With a traditional trust, any money you transfer is considered part of your assets and therefore can be seized by creditors. If you’re worried about your debts or those left behind by other loved ones, setting up an FLP can shield your estate and assets from legal trouble. FLPs also offer privacy for families with multiple property owners or business partners—no official paperwork needs to be filed to set one up, making them private and invisible in terms of their public presence; however, note that no complete anonymity can be guaranteed at any time. When it comes to taxes, FLPs allow income-earning properties to pass through without being taxed twice on profits. This means less tax liability for heirs after a death or sale of a family business. If you already have an LLC (limited liability company), you may already have some of these advantages! But if not, setting up an FLP has many benefits beyond those listed here. For more information, speak with a lawyer specializing in FLPs and trusts.
Who Should Consider Setting Up A Family Limited Partnership Foundation?
Whether it’s to avoid probate, transfer assets after death or reduce taxes, establishing an FLP foundation is common among high-net-worth individuals. Business owners and real estate investors often use FLPs for asset protection and tax purposes. However, setting up an FLP foundation isn’t just limited to these individuals; anyone with a family member who may be affected by their will can also benefit from setting up an FLP. Here are some questions you should ask yourself before deciding whether or not you should set up an FLP. Do I want to give my spouse more control over my assets? Do I want to ensure my children receive a certain amount of money at specific times in their lives? Am I worried about creditors? Would I like to limit how much taxes my heirs have to pay on inheritance? If so, then creating an FLP foundation might be right for you. Before choosing to create an FLP, however, it’s important to note that there are disadvantages and advantages associated with them. For example, if your state doesn’t recognize FLPs as legal entities, you won’t be able to use them for estate planning purposes. Another disadvantage is that when you create an FLP foundation, your beneficiaries will likely lose eligibility for government benefits such as Medicaid and Social Security. Finally, because they’re complex structures requiring additional paperwork and attorney fees, setting up an FLP foundation could cost anywhere between $1,000 and $20,000. Before making any decisions regarding your future finances, consult a professional financial advisor who can provide guidance based on your unique situation.
Future Returns Excluded from Estate Taxes
One of several tax incentives provided by FLPs is that they can be used to ensure you aren’t taxed when your income increases in retirement. If you create an FLP and place your stock options into it, for example, at 70 1⁄2, you will have to pay out those options at fair market value; if you die with FLP assets in your estate, those assets will be taxable (but only upon sale or distribution). By contrast, other assets won’t generate income for years or decades—like long-term stocks or investment real estate—so once they are passed to heirs as inheritance, any future increase in value will be excluded from federal estate taxes. Learn more about how these advantages work here.
There may be some potential disadvantages of setting up an FLP. As noted above, all transfers between spouses are free from gift and estate tax. However, these exclusions do not apply to transfers outside of marriage: so, unlike regular property, which goes directly from one spouse to another via gift during life or will after death, transfers between non-spouses in an FLP must first pass through probate court before being transferred to beneficiaries outside of marriage — potentially slowing down their ultimate destination. Additionally, because FLPs were mainly created for estate planning purposes, you’ll need a professional experienced in doing so: leaving your best interests unchecked could cause unforeseen consequences over time.
What A Family Limited Partnership Is Not
Before delving into what it is, we should first understand what it isn’t. While several different types of partnerships are available (Limited Liability Partnerships, S corporations, etc.), an FLP is different from any other form of collaboration. An FLP falls under another type of entity: a limited liability company (LLC). This distinction comes with certain benefits that can be outlined below. But before we get to those, let’s talk about what an FLP isn’t and how it differs from traditional LLCs. An FLP is not a limited liability company (LLC). Many people confuse these two entities because they have similar names and similar structures; however, they are very different things. The main difference between them is that LLCs have members who share in the ownership of their business.
In contrast, FLPs have partners who own separate businesses but participate in one business venture together as a team. For example, if you and your spouse own 50% of a restaurant, you both have equal control over every aspect of its operations. You both decide when to open or close, which suppliers to use for ingredients, what food items to serve on your menu, etc. However, if you owned 50% of an FLP with your spouse, you would run your independent businesses (i.e., restaurants) and operate a single restaurant together as partners in your FLP venture. If you think about it like that—you are running one business while working alongside someone else who runs another—it makes sense why most attorneys say partnership instead of a company when referring to family-limited blocks.