LIMITED PARTNERSHIPS
GENERALLY
A Family Limited
Partnership is an entity you set up to maximize the wealth you pass on to your
heirs instead of to the IRS or your creditors. Family Limited Partnerships present amazing planning
opportunities.
Benefits include:
- Great estate planning entity
- Passive tax treatment for
investments
-
Asset Protection for limited partners
- Discount valuations for assets
- Control with only partial ownership
After the family
limited partnership is set up, assets are transferred into the partnership in
exchange for “units”. Units represent
ownership of a partnership like shares represent ownership of a
corporation. The units are divided up
between the various partners equal to their contribution to the partnership. Partners could include married couples and
their children, individuals and corporations or business partners.
There are two types
of partners. There is the general
partner who is in control of the partnership.
The general partner also has the personal liability for the activities
and liabilities of the partnership.
Limited partners have no control and no personal liability. When the assets inside the family limited
partnership cause liability, a corporation is often used as the general partner
to avoid personal liability. Otherwise
you are generally the managing general partner and so you manage and control
the family partnership. As general
partner you decide whether to buy or sell assets and whether to make
distributions, especially cash, to the partners. Other family members including children and grandchildren are
generally the limited partners without control or liability.
Family limited
partnerships can provide excellent asset protection. If a creditor obtains a judgment against you, they cannot seize
assets of the family partnership, unless it is dissolved. Of course, the partnership is structured so
it is dissolved only with the consent of all the partners. The creditor cannot seize your partnership
interest and so cannot exercise any rights as a partner. You or your corporation, as the general
partner, remain in control of the partner partnership. If you choose as general partner not to
distribute partnership profits, the creditor will still have the unpleasant result
of having to pay income tax on profits that they are not currently
receiving. This discourages creditors
from obtaining a charging order. As a
consequence, assets in a family partnership, in general, are protected from
creditors.
The family
partnership itself is not subject to federal income tax. Rather, each partner reports his or her
proportionate share of the partnership income or loss personally . Therefore, if the partnership's income comes
from investments you can split income with family members and take advantage of
their lower marginal income tax rates.
For example, parents in a 39.6% tax rate could transfer income producing
assets to their children who might be in a 15% tax bracket. That is a tax savings of 24.6%. This allows families to keep more of what
they earn.
With estate tax as high as 55%, you must
actively and aggressively plan to keep your estate for your loved ones. Family Limited Partnerships are an excellent
entity for estate planning. They allow
you to transfer the asset into the partnership and begin gifting part of the
partnership to your children. This
allows you to reduce the value of your estate, and therefore, reduce the
likelihood that you will pay gift and estate taxes.
Additionally, there are a number of ways to accelerate your gifting program to
your children. The Internal Revenue
Service allows you to give up to $10,000 to anyone each year without triggering
a gift tax. For example, you could give
$10,000 to each of your children each year and avoid the tax. If you're married, your spouse can make
separate gifts for the same amount, which means that you could together gift
$20,000 a year without paying a gift tax.
One key benefit of forming a Family Limited
Partnership is that you can give shares of the partnership to your kids or
grandchildren, and the value of the gifts can be reduced for tax purposes. This effectively allows you to gift more
than the $10,000 you would otherwise be
allowed to gift. The reason the value
of the partnership is reduced is because limited partnerships have limited
marketability to outside investors. The
discount given varies but is often around 35%.
This allows you pass more to your children each year, often a third
more, and still be within the $10,000 exemption from gift tax. Additionally, when you die, your own share
of the partnership may be valued at much less than the actual value of the
partnership as a whole, providing additional estate tax benefits.
DO I NEED A FAMILY LIMITED
PARTNERSHIP
A primary benefit of
the family partnership is the reduction your taxable estate . This allows your family to keep more of what
you have worked so hard to accumulate during your lifetime. However, either you or your corporation can
be the general partner and therefore, you will still control the partnership
and its assets. In essence, you retain
control while reducing your taxable estate.
You absolutely need a
family limited partnership if you want to:
-Reduce gift taxes
-Reduce
estate taxes
-Protect
your assets
-Receive
passive income
-Remain in control of your assets
There are two types
of partnerships: general partnerships and limited partnerships. Limited partnerships generally work better
for estate planning because your heirs, the limited partners, have no say in
managing the partnership, and it is harder for creditors to get at a limited
partnership interest, therefore, the asset protection for the limited partners
is better than it is in a general partnership.
What
assets are appropriate for the family partnership?
The most common
assets put into a family partnership are the following:
- real estate;
- other partnership
interests (limited or general);
- brokerage accounts,
savings accounts, stocks and bonds
- cash.