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.

ASSET PROTECTION

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.

TAX BENEFITS

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.

ESTATE PLANNING

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

GENERAL PARTNERSHIPS VS. FAMILY LIMITED PARTNERSHIPS

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.