For families with significant assets in businesses, real estate, or other income producing assets who are looking for effective ways to pass assets to heirs in a tax-efficient manner, Family Limited Partnerships are worth exploring.
It is a limited partnership in which (generally senior) family members contribute assets in exchange for general and limited interest, and then in turn transfer limited interest unto heirs. The partnership itself isn’t taxable – the owners of the partnership report its income on their personal tax returns, in proportion to their interests.
This happens in two steps. First, you transfer your assets into the FLP in exchange for “general partner interest” and “limited partner interest.” Next, you use your annual gift exclusion to transfer limited partner interests to your children/heirs, thereby removing it from your estate for federal estate tax purposes.
Those who have general partner interest control all management, investment, and distribution decisions. Those who have limited partner interest (which your heirs will receive as you transfer interest to them) cannot participate in management decisions and have limited liability.
Creditors cannot force cash distributions, vote, or own the interest of a limited partner without the consent of the general partners. Also, FLPs offer protection in the event of a divorce in the family. If a limited partner ceases to be a member of the family, the partnership documents can require the asset be transferred back to the family at fair market value.
The first step is to consult an estate planning attorney and have them examine your specific financial situation. Setting up and maintaining FLPs can be expensive, so you want to be sure it makes sense given your needs before proceeding. The estate planning attorney can usually refer you to appraisers and tax professionals who would help with the valuing of assets and management of all tax-related reporting.
If the Family Limited Partnership asset protection features and tax-saving capabilities appeal to you, call one of our Wealth Managers at 1-800-541-7774 to discuss it further. A good first step is to take a full inventory of all of your assets and have a discussion about your objectives. From there, one of our Wealth Managers can help you decide what to do next. Get started on your investment plan by answering a few questions here.
Seton is a CERTIFIED FINANCIAL PLANNERTM professional and Vice President of Investments at WrapManager, Inc.
Source:
To the extent this presentation includes any state or federal tax advice, the presentation is not intended or written by WrapManager, Inc. to be used, and cannot be used, for the purpose of avoiding federal tax penalties. WrapManager, Inc. does not advise on any income tax requirements or issues. Use of any information presented by WrapManager, Inc. is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.