The Pros and Cons of Setting up a Family Limited Partnership

Family with a family limited partnership.

A family limited partnership, or FLP, can be an effective tool for managing and protecting assets. It can offer asset protection benefits and tax savings, but it may come with risks as well. With careful planning, a family limited partnership can provide families with the opportunity to enjoy financial stability and security for generations.

What is a Family Limited Partnership?

A family limited partnership (FLP) is an agreement between two or more members of a family that defines their ownership interests in property, investments, or other assets. Usually the limited partner is a trust for the benefit of the children. We put “non-risky” assets in a FLP. By “non-risky,” we mean something that’s not likely to get sued. Cash isn’t going to get in a car accident. A stock account isn’t going to attract a sexual harassment lawsuit. And a membership interest in an LLC (limited liability company) isn’t going to get sued for malpractice. The family can safely pool those assets together in an FLP.

The limited partnership agreement establishes the rights and responsibilities of each member, as well as any tax or management considerations. FLPs are typically structured to limit creditors’ access to the family’s assets. The limited partnership agreement also allows for advantages such as greater control over investments, reduced taxes, and simpler estate planning and asset protection.

Pros of a Family Limited Partnership.

One of the biggest benefits of establishing a family limited partnership is its ability to provide asset protection. Because FLPs are structured to separate members from the asset, should one member fall into financial hardship, creditors will not be able to access the member’s portion of the family’s property or assets. Additionally, with an FLP, members can benefit from estate and tax planning. When partners make gifts to younger generations, they can take advantage of the discounted gifting rules established by the IRS and transfer larger sums of money at reduced costs. Furthermore, FLPs can provide greater control over investments as well as greater flexibility in estate planning.

Cons of a Family Limited Partnership.

Despite the numerous benefits of establishing a family limited partnership, there are some potential drawbacks. The formation and maintenance of an FLP can be costly and time consuming. However, with proper guidance, the parties can minimize costs and complexity. Additionally, an FLP’s structure may not adequately cover members when it comes to personal liability risks, like negligence or fraud. Lastly, family dynamics may become strained when dealing with issues related to the fairness of distribution amongst partners. In order to address these issues adequately up front, it’s important to involve an experienced attorney in the formation process. The attorney will help you think through all of these legalities.

Who Should Consider Setting up an FLP?

Setting up a family limited partnership is not suitable for every family. But they can be beneficial to a variety of families, particularly those that have accumulated significant wealth. By putting wealth and assets into an FLP, families are able to ensure that their assets get managed in the most efficient way and are protected from creditors. Furthermore, family members who inherit or receive a stake in an FLP  benefit from having access to potentially greater returns on investment. They also have more control over the investment of their assets than they would if (for example) a third party trustee was in charge of everything.

How to Set up and Fund the FLP.

The first step to establishing a family limited partnership is deciding which family members will serve as partners. Typically, the parents or grandparents (or their trust) are the general partners and control the majority of voting rights. Then the children and grandchildren (or trusts for their benefit) are limited partners with only passive voting rights. Next, you must create the partnership agreement document that outlines ownership shares, operational guidelines, and other important details. It is essential to discuss how each partner will pay contributions into the FLP and how the partners can receive distributions or use funds for investments. Finally, it is important to fund the FLP with initial capital from primary assets under its control.

Conclusion.

A family limited partnership is an essential component to a family wanting to do multi-generational planning. If you want to learn if you and your family could benefit from having an FLP, give us a call at 602-443-4888.

 

 

ABOUT THE AUTHOR

Founding attorney Paul Deloughery has been an attorney since 1998, became a Certified Family Wealth Advisor. He is also the founder of Sudden Wealth Protection Law.

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