Family Limited Partnerships —
Giving, Yet Retaining Control
One of the ways of avoiding estate taxes is by gifting money or assets to your children, at a rate of no more than $12,000/yr per child (or $24,000 if you are a married couple). More than this will incur gift taxes.
But gifting children in this way moves money and assets into the children’s control, something that you may not want to do in your lifetime.
Now avoiding estate taxes is attractive to you if you, or you and your spouse, have an estate worth over $2,000,000. This is because, in 2008, there is only $2,000,000 per spouse in estate tax exemptions available (if used correctly with Marital Trusts) and, therefore, every dollar in your estate not passed to your heirs via the estate tax exemption will be taxed at approximately 50%.
What then, is a suitable solution? Family Limited Partnerships (FLPs).
While FLPs are not a primary estate planning tool (those are your wills and marital or A&B Trusts), they can nicely supplement an estate plan and save your heirs sometimes millions of dollars in estate taxes, when done correctly.
The attractive benefit of FLPs is that they allow for accelerated gifting through the use of substantial discounts on assets in the FLP.
Typically, an FLP would be set up by you and your spouse who contribute assets to the FLP in return for General Partnership units and Limited Partnership units. Normally, the general partners have a 1% interest in the FLP (commonly held by a C-Corp to avoid personal liability) and limited partners have a 99% interest. You and your spouse can then embark on a plan of giving Limited Partnership units to your children and grandchildren, while retaining the General Partnership units that control the FLP. Through this gifting, and through the discounting of the ownership shares, your children would eventually end up owning the assets they would have otherwise received through your estate. But, and this is the important “but” — those assets would have passed to your children free from estate taxes.
This is not the only advantage of gifting to your children via FLP, either.
Because you and your spouse are set up as General Partners, and your children as Limited Partners, you still retain control of the FLP assets during your lifetime.
Not only that, there are two powerful discounting provisions. The first occurs because the interest in the partnership is no longer marketable in the open market — because the interest can only be sold to another family member. The second is due to the fact that because the children have no voting rights, they have a “minority interest”.
Depending on the law firm, CPA firm, and valuation firm involved, assets can be discounted upwards of up to 40% of their normal market value. (A notable exception occurs when using a “Freeze” Partnership which can obtain upwards of a 90% discount — this is discussed in the article on “Freeze!” Partnerships.)
If your estate goes beyond $2,000,000, you should seriously consider FLPs as an important and valuable piece of your estate planning puzzle. Why not call our office today at (269) 216-9978 to find out how this, and other strategies, can save you substantial amounts on your estate taxes? Or sign up for our free, no-obligation consultation, where you will discover unique and powerful strategies to grow and protect your wealth.