The Many Uses of a Family Limited Partnership - Part I
What is a Family Limited Partnership?
The Family Limited Partnership is a legal entity formed under a state's Limited Liability Partnership Laws. FLPs are limited partnerships owned and operated exclusively by family members. Families can use an FLP to accomplish many things. Parents can use the FLP to transfer the family business and other assets to their children while still maintaining control over it all. They can use the FLP to hold life insurance, to fund trusts, and to reduce estate and gift taxes.
Why Establish a Family Limited Partnership
You've worked hard for your success and you want to protect it! A Family Limited Partnership will protect your wealth for your personal security. It will protect your wealth from many of the following:
- your heirs -- you don't want to give them too much too soon
- collapse -- you don't want to see what you've built up falling down
- unknown heirs -- future in-laws
- the failed marriages of children or grandchildren
- family separation -- you want your wealth to promote family unity
- predators -- this the "age of the lawsuit"
- creditors -- you don't want the bad investment of one family member to jeopardize the total family security
- the IRS -- the biggest, meanest predator/creditor of them all -- it wants half in cash before anyone else gets anything!
- changing rules and regulations -- you need flexibility
- inflexible decisions -- you don't want to lock yourself into a position you can't change later
Characteristics of a Family Limited Partnership
The Family Limited Partnership has many of the same characteristics as regular partnerships. Partnerships are easy to establish. Two or more people can simply decide that they want to form a partnership. Partnerships have unlimited liability. Each partner is 100% liable for the partnership. Any partner could be fully liable for all partnership debts, regardless of the percentage owned.
The partnership does not pay taxes. The individual partners pay taxes on the income the partnership receives. The amount of income each partner receives depends on the percentage of the partnership each owns. Each partner must file one information return saying how much the partnership made. The partners will then attach a copy of this return to their individual return and pay taxes on the partnership's income that way. Partners must pay taxes on this income even if they do not receive any distributions.
A Family Limited Partnership limits the partners to:
- Family members
- Trusts created for family members, or
- Privately owned corporations of family members.
Families can cancel an FLP at anytime before its scheduled termination. However, all partners must unanimously consent. All of the assets in the FLP will be transferred back to the parents direct ownership without penalties.
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