The Benefits of a Family Limited Partnership

Whether you’re trying to secure your family’s financial future, or you want to know how to keep a property in the family forever, forming a legal entity around your assets is a viable option to not only work toward protecting your wealth but also to help with growing it. Family limited partnerships (FLPs) have emerged as a popular estate planning tool in recent years, offering a range of benefits for families looking to manage and preserve their wealth including:

1. Helping facilitate multigenerational wealth transfer
2. Providing asset protection and liability shielding
3. Offering tax-efficient strategies for estate and gift planning
4. Allowing for more flexible management and succession planning
5. Promoting family unity and collaboration

In this article, we’ll delve into the benefits of a family limited partnership, exploring what it is, how it works, and the advantages it offers compared to other estate planning strategies. We’ll also discuss some of the nuances and potential drawbacks of FLPs in general.

What is a family limited partnership?

A family limited partnership is a legal entity formed by family members to jointly own and manage assets such as businesses, real estate, or investments. In an FLP, there are two types of partners: general partners and limited partners. 

General partners typically hold management authority and assume responsibility for the day-to-day operations of the partnership, while limited partners have a passive role and contribute capital without involvement in management decisions.

Family limited partnership examples

Consider a scenario where a family owns a successful business. By forming an FLP, they can transfer ownership shares to younger generations while retaining control of the business. This allows the older generation to gradually transition ownership and management responsibilities to their heirs, ensuring continuity and preserving family wealth.

In another example, a family may own a portfolio of real estate properties. They establish an FLP, meaning they can consolidate ownership under a single entity, simplifying management and succession planning. Additionally, the FLP structure provides liability protection, shielding individual family members from personal liability related to the properties.

Read more: how to transfer a property title to a family member

5 main benefits of family limited partnerships

Family limited partnerships offer several benefits, making them an appealing option for families looking to manage and protect their assets effectively. Here are 5 of the main benefits of utilizing an FLP:

1. Helps facilitate multigenerational wealth transfer 

The strategic advantage of FLPs in facilitating multigenerational wealth transfer lies in their flexibility and the tax benefits they offer. Through the distribution of limited partnership interests, families can significantly reduce estate taxes, allowing for a more substantial transfer of wealth to the next generation.

This is because the value of the limited partnership interests can be discounted for lack of marketability and control, effectively lowering the taxable value of the transferred assets.

Furthermore, FLPs enable the senior members of the family to maintain control over the assets and decision-making while the younger generation holds an economic interest, encouraging financial responsibility and engagement without immediate full ownership responsibilities. This structured approach offers a powerful mechanism for wealth preservation and growth across multiple generations, ensuring the family’s legacy endures.

2. Provides asset protection and liability shielding 

FLPs are instrumental in helping to safeguard assets from personal creditors and potential litigants. By holding assets within a family limited partnership, individuals can work to achieve a level of protection since creditors generally find it more challenging to access partnership assets to satisfy a personal debt or judgment. This protective mechanism is due to the structure of FLPs, where the partnership, rather than the individual partners, owns the assets. 

Consequently, creditors may only be entitled to a “charging order,” which limits them to distributions (if any) that the partnership might make to the debtor-partner, without conferring any management or decision-making rights over the partnership’s assets. This layer of protection may help lessen the risk of the family’s wealth against unforeseen personal liabilities and also encourage a more disciplined approach to wealth management and planning.

3. Offers tax-efficient strategies for estate and gift planning 

In addition to asset protection and intergenerational wealth transfer benefits, family limited partnerships (FLPs) play a crucial role in implementing tax-efficient strategies for estate and gift planning. Utilizing FLPs allows for the strategic transfer of wealth to subsequent generations while minimizing the impact of estate and gift taxes. 

By gifting partnership interests, rather than directly transferring the underlying assets, parents can take advantage of annual gift tax exclusions and lifetime gift tax exemptions. This method can drastically reduce the taxable estate’s size over time. 

Furthermore, because the partnership interests often qualify for valuation discounts due to lack of marketability and minority interest, the transferred value for tax purposes can be significantly lower than the actual value of the assets. This sophisticated approach can help families preserve more of their wealth for future generations, rather than losing a substantial portion to taxes.

Read more: is Texas a tax-free state?

4. Allows for more flexible management and succession planning 

The flexible management structure of family limited partnerships (FLPs) is particularly beneficial for families that wish to involve multiple generations in the family business or estate without relinquishing total control. This arrangement enables senior family members to retain significant decision-making power while gradually introducing younger generations to the management of the family’s assets.

Through specified partnership agreements, responsibilities can be allocated according to the individual family member’s expertise, interest, and readiness to contribute, allowing for a tailored approach to succession planning. This not only helps in preparing the next generation for leadership but also facilitates a smoother transition when the time comes, which may solidify the longevity and sustainability of the family’s legacy.

5. Promotes family unity and collaboration in managing shared assets 

By engaging family members in a common venture, FLPs promote collaboration, communication, and shared decision-making. Working together to manage and grow shared assets fosters a sense of unity and collective responsibility among family members, strengthening family ties and promoting a shared vision for the future.

Family limited partnership vs trust

One common question is how an FLP compares to a trust, especially as it relates to estate planning. While both FLPs and trusts are commonly used as estate planning strategies, they serve different purposes and offer distinct advantages. A trust is a legal arrangement where a trustee holds assets on behalf of beneficiaries. Trusts are often used to manage assets and distribute them according to specific instructions, such as providing for minor children or planning for charitable giving.

In contrast, an FLP is primarily designed to hold and manage family-owned businesses or investments. Unlike a trust, an FLP allows family members to actively participate in the management of assets, making it particularly suitable for families seeking to preserve and grow their wealth through entrepreneurial ventures.

How is a family limited partnership taxed?

One of the key benefits of a family limited partnership is its tax efficiency. Family limited partnership estate planning and asset transfer advantages include the following:

• Gift tax exclusion. By gifting partnership interests to family members, individuals can utilize the annual gift tax exclusion, currently set at $18,000 per recipient. This allows for tax-free transfers of assets, reducing the taxable value of the individual’s estate over time. (Continue reading to learn more about the Texas gift tax exclusion.)
• Valuation discounts. Due to restrictions on transferability and lack of control associated with limited partnership interests, the IRS allows for valuation discounts when determining the fair market value of FLP assets. These discounts can result in lower estate and gift tax liabilities, maximizing the transfer of wealth to future generations.
• Income tax benefits. FLPs are pass-through entities for tax purposes, meaning that income and losses are allocated to individual partners and reported on their personal tax returns. This can result in potential tax savings, as partners may be able to offset income from the partnership with deductions and credits.

What is the downside of a family limited partnership?

Despite their many benefits, family limited partnerships also have some drawbacks that should be carefully considered. Establishing and maintaining an FLP requires careful planning and ongoing administration, including the drafting of partnership agreements and adherence to legal formalities. The complexity of FLPs may necessitate professional assistance from attorneys, accountants, and financial advisors.

Additionally, while FLPs offer flexibility in transferring ownership to future generations, they also involve relinquishing some degree of control over assets. General partners may retain management authority, but limited partners have restricted influence over partnership decisions.

Lastly, collaborating with family members in a business or investment venture can present challenges, including disagreements over management, financial decisions, and succession planning. Effective communication and conflict resolution are essential for maintaining harmony within the partnership.

Family limited partnership pros and cons

To provide a clearer overview of the advantages and disadvantages of establishing a Family Limited Partnership (FLP), the following table compares the key pros and cons, allowing for an informed decision-making process.

Pros	Cons
Enables smooth multigenerational wealth transfer	Involves relinquishing some control over assets
Provides asset protection and limits personal liability	Can lead to complex family dynamics and conflicts
Utilizes tax-efficient strategies for estate and gift planning	Requires careful planning and ongoing administration
Allows flexible management and succession plans	May incur legal and administrative costs
Fosters family cohesion and collaboration in asset management	Subject to regulatory and tax compliance requirements

Take advantage of all the benefits of a family limited partnership with Avidian Wealth Solutions.

Family limited partnerships represent a powerful tool for families looking to preserve and manage their wealth across generations. By leveraging the benefits of FLPs, families can navigate the complexities of estate planning, minimize tax liabilities, and foster a legacy of financial security for future generations.

At Avidian Wealth Solutions, our team of financial advisors can work with you to develop a comprehensive plan that works to protect your family’s assets and limit your personal liability. Our firm works out of a boutique family office-style environment that allows us to provide personalized attention to each client and give consideration to various aspects of your financial landscape.

Schedule a conversation with one of our tax advisors in Houston, Austin, Sugar Land, or The Woodlands today to see how we can help you achieve your financial goals while working to minimize your tax liability.

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