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Asset Protection & Business Planning

Family Limited Partnership

The Family Limited Partnership ("FLP") has become an extremely helpful entity in the Estate Planning arena. It is predominantly used to keep a piece of property or business in the family beyond the life of the founder. It can also provide estate tax savings and allow for leveraging of one's assets in the form of discounted gifting or life insurance. Finally, it allows the general partner of the family to continue to control the assets, yet get the other family members involved in its operations and management.

FLPs are becoming more and more popular and can provide unique benefits to family owned land or businesses. Essentially, an FLP is a partnership that must be between family members. It must also be organized under state law and is subject to special rules under the Internal Revenue Code.

Until recently, FLPs were used primarily as a means of (1) shifting the income tax burden from parents to children or other family members, or (2) to "freeze" the value of assets by shifting future growth and various assets to other family members. Although these principal uses of an FLP have been somewhat curtailed by the passage of the "Kiddy Tax" and the enactment of various other IRS code sections, the many other benefits provided by the FLP have made it a valuable tool in developing a comprehensive estate plan.

With greater frequency, many land and business owners are coming to recognize the many non-tax benefits that an FLP can provide. An FLP would be an appropriate device in the following circumstances:

1. When retention of ownership of assets within the family unit is desired. This could arguably be the best "non-tax" reason for creating an FLP. The FLP allows the family to keep either land or a business under the control of the family for many years to come and provide a mechanism that is much easier to control than the typical business structure or trust.
2. When a parent desires to maintain control over assets which will eventually be transferred to younger generations. This is a wonderful benefit because parents can still be in control, yet at the same time get younger family members involved. Generally, the parents will be designated the "general partners" and other family members the "limited partners."
3. Where flexibility in setting the rules for managing property is desired. Unlike an irrevocable trust, an FLP can be amended by vote of a given percentage of partnership interest. This results in a parent being able to easily change the governing rules which apply to the partnership if the parent maintains the necessary percentage ownership interest to amend the agreement.
4. Where it is desirable to protect assets from creditors of the parents. This benefit is typical of any limited partnership because the limited partners' liability is limited to their investment.
5. Where a parent desires to protect assets which are to be transferred to younger generations from being dissipated through mismanagement or divorce. Special provisions can be drafted into the buy-sell sections of the FLP Agreement requiring ownership to remain with the immediate family. Hence, if a divorce occurs in the family, it automatically triggers a buy-out of certain interests so a divorced spouse will be cut out of the ownership.
6. To discourage family members from fighting over FLP assets and to provide a forum for the resolution of disputes among family members when such disputes arise. Once again, the FLP Agreement can set forth specific provisions and guidelines for dealing with disagreements of the evolution of the family land or business.
7. Finally, the two tax planning benefits can once again be quite significant. An FLP can reduce the value of an estate for estate, gift and generation-skipping tax purposes. Past cases demonstrate that the value of FLP interest typically will be reduced by valuation discounts falling in the 30 to 35 percent range. Also, an FLP can shift the income tax burden from a parent who is in a high-income tax bracket to a child or other relative who is in a lower income tax bracket.

In summary, a family with land or a business that is currently managed by two or more generations of a family should at least consult their legal and tax advisor to discuss the option of utilizing an FLP.