People exposed to the estate tax will have to take steps to mitigate this liability when establishing their estate plan. One way this can be done is through the creation of a family limited partnership. Right off the bat you remove some of your assets from your estate for estate tax purposes when you create and fund an FLP. There are other tax advantages as well.
To explain by way of example, let’s say you create such a partnership and provide the initial funding of $1 million. You serve as the general partner. In that capacity you have total control of partnership operations. You name your daughter a limited partner and give her a 25% interest in the partnership. She cannot sell this share and has no control over when and how distributions may be made; this is the sole prerogative of the general partner.
The IRS assesses the taxable value of this share based on what it could be hypothetically sold for on the open market. Though it is 25% of $1 million, the taxable value will be less than $250,000 because of the limited partner’s lack of control of the funds that represent his or her share and their minority interest.
Families sometimes choose to create this type of partnership to streamline their collective accounting and organizational expenses while gaining tax advantages in the process. If structured properly there are also tax discounts that apply to transfers between members of the partnership.
It should be noted that a family limited partnership can be useful as a way to protect assets in the event of a partner going through a divorce or if they are subject to a lawsuit.
To learn more about family limited partnerships and how an FLP might fit into your estate plan, simply take a moment to arrange for a consultation with an experienced estate planning attorney.
Author, President and Founding Attorney
Parman & Easterday