A family limited partnership is a holding company owned by family members, created to hold a family's business interests, real estate, or other assets. The purpose of creating a family limited partnership is to achieve creditor protection and reduce gift and estate taxes while maintaining control over the management and distribution of those assets. For families whose business or real estate portfolio is rapidly appreciating, it is often non-business purposes such as tax planning, creditor protection planning and succession planning that compel them to choose the family limited partnership as their preferred organizational structure. Family limited partnerships are powerful estate planning tools. Their structure enables the transfer of ownership from one generation to the next without giving up control of the underlying property. They give families the opportunity to reduce or avoid income and transfer taxes, ensure continuity of family ownership in a business and provide liability protection for the partners.
There are two classes of owners in a family limited partnership. The first are general partners, who are responsible for the management of the partnership and its assets. They are typically the business-owning parents. The second are limited partners, who have an economic interest in the partnership but lack the ability to control, direct or influence the operation of the partnership. These are typically the children and grandchildren of the business-owning parents. They have the right to their share of the partnership income and are liable only to the extent of their investment in the partnership. General partners are the operators of the partnership and the limited partners are the passive owners. Families often choose to gift large portions of their estate to their heirs through the use of a family limited partnership while they are still alive. They can avoid state and inheritance taxes entirely and stretch out their available federal tax exemption by transferring property at a discount to its fair market value.
It is important to know that family limited partnerships are real business arrangements, and must demonstrate the attributes of a business partnership or face being classified as a gift made to the children by the IRS. Regular meetings must be held, formal minutes taken and reasonable compensation paid to the general partners for their services to the partnership in accordance with the Internal Revenue Code.
To learn more about family limited partnerships, contact First Class Counsel and speak to one of our attorneys to find out if establishing a family limited partnership is right for you and your family.