Although FLPs have come under intense IRS scrutiny and attack, the properly formed, funded, and operated FLP holds a significant place in estate and business succession planning. Because there is no "one size fits all" FLP structure, the advantages and disadvantages of this entity should be weighed alongside those of other entities, such as the S-corp and LLC, and in light of your business and personal needs.

FLP structure

The FLP has long been recognized as a popular and effective wealth preservation, estate planning, and asset protection tool. An FLP is simply a limited partnership formed by family members. As with a traditional limited partnership, an FLP consists of at least two partners: a general partner and a limited partner.

A general partner controls the operation, management, and investment decisions of the partnership, and bears unlimited liability for the FLP's debt and other liabilities. A general partner must own a minimum one-percent interest in the partnership. The general partner who may only own a one-percent partnership interest in the FLP, however, will nevertheless be able to control and manage 100 percent of the FLP assets. Moreover, a corporation, LLC, S-corp, or trust may act as general partner of an FLP, thereby reducing a controlling family member's exposure to personal liability.

As with traditional partnerships, the FLP is not a taxable entity. Instead, the FLP is a flow-through entity and both general and limited partners report their distributive share of partnership income, loss, and deductions on their individual income tax return.

Formation and formalities

In the typical FLP context, parents (or grandparents) contribute the majority of the FLP's initial assets in exchange for both general and limited partnership interests. The types of assets typically transferred to FLPs include appreciable assets, such as the family business, real estate investment properties such as condominiums and other rental properties, as well as cash, stock, and other marketable securities. Because of the varied types of assets that can be transferred into an FLP, the entity is a preferable structure for managing many family assets, not just the family business.

No tax is due upon the transfer of any appreciated asset to an FLP. Furthermore, the transfer of both FLP and LLC interests may be discounted for lack of marketability and for lack of control. This provides significant gift and estate tax savings when FLP interests in the partnership assets are transferred from the older to younger generation.

Conclusion

There is no "one-size fits all" FLP structure. The tax and non-tax advantages and disadvantages, entity structure, and operation of FLPs must be weighed against the competing advantages and disadvantages of the S-corp and LLC structure. Most importantly, in determining whether an FLP is right for you, your personal and business goals must be thoroughly considered. An FLP does not do everything for everyone, and an attempt to look at it as such will likely land you in big trouble with the IRS. But with the refinement of goals and attention to details, an FLP can save the overall family unit significant resources.

If you would like more information on the uses of the family limited partnership structure, or more particularly whether an FLP makes sense for your family's financial well being, please contact our office.