The Pros and Cons of a Family Limited Partnership

FLPs are not for everyone, as mixing personal and business interests has challenges.

FLPs are not for everyone, as mixing personal and business interests has challenges.

A family limited partnership (FLP) offers a way for multiple generations of people within families with significant wealth to save money on income, gift and estate taxes. It has become an increasingly popular alternative business structure to limited liability corporations (LLCs) and S corporations for parents of family-operated businesses.

Succession Plan

A main benefit of setting up a family limited partnership is that it creates a natural plan to keep the business within the family. Parents can create an economically sensible way for their business and wealth to pass on to children without the normal taxes that come with estate inheritance. As parents get older, they can place their children in leadership roles of the business while still retaining controlling interests and decision-making authority.

Tax Advantages

While estate-tax laws change yearly, the financial advantages of an FLP are major compared to typical passing of wealth through estate planning and a will. Since your children are established partners in the business, you simply pass on to them your percentage of ownership when you die. Depending on the size of the estate, this can minimize the possibility of having a significant percentage of your wealth eaten up by estate taxes, according to LegalZoom. You can also pass along portions of your interest in the FLP over time without gift taxes. Normally, if you gift money to your kids, they must pay gift taxes on amounts that exceed a set minimum annual amount.

Complexity

Establishing an FLP is not nearly as simple as some of the other types of partnership or small corporate structures. It takes time and expertise to prepare the formal partnership agreement and supporting business and asset valuations, and the rules for putting together an FLP are strict and sometimes hard to interpret. Roger D. Lorence of The CPA Journal suggests that you should never try to create an FLP without professional help from financial experts or accountants. It is very easy to overlook some of the rules and documents needed to establish your FLP properly.

Commitment

An FLP is a formal, legalized partnership that outlines management of your family business and assets. Because of the strict accounting requirements and structural complexity, FLPs are very difficult to undo. This is a problem when heirs to the partnership don't get along. Tension among siblings can intensify when they are forced to work together to manage the business and assets of the partnership. Before establishing an FLP, carefully consider the relationships in your family and the ability of heirs to work well together.

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