This site is best viewed using Mozilla Firefox browser.

Legal

2002-09-01 11:00:00

What’s a FLP?

John Gibson Question: A friend of mine recently created a family limited partnership and placed most of the family’s assets into the family limited partnership. What are the advantages in doing so? What are the disadvantages?Answer:  A Family Limited Partnership is simply a limited partnership applied to a family situation. A limited partnership is one form of business organization in Kansas. Other forms are the corporation, general partnership, limited liability company, etc. All of the different forms of business organization in Kansas including a limited partnership were discussed in more detail in the March, 2002 issue of the Q & A Times, in an answer provided by accountant Larry Sell and myself. A copy of that previous Q&A Times can be obtained by calling Chart Marketing at (316)-721-9200.  A limited partnership is a business entity that has some characteristics of a general partnership and some of a corporation. A limited partnership has at least one general partner and at least one limited partner. The role of the general partner is to manage the business, and is similar to that of a general partnership partner in that each general partner is liable for all of the partnership debts and liabilities. Usually, in FLPs the general partner is the person that controls the family business or family assets. Often the general partner is one or both of the parents. Limited partners are similar to stockholders in a corporation in that they are insulated from liability as a stockholder, and are liable only to the extent of the limited partnership’s ownership value. Typically, in FLPs the limited partners are the children of a family. The thrust of the FLP is to allow parents to transfer assets or the family business to the children while maintaining control.Use of FLPs has been increasing in the past few years as a vehicle for estate planning, most notably in large value estates and/or in family business situations. However, the current changes in the federal estate tax rules, as discussed in the July, 2002 issue of the Q&A Times, may make FLPs not as attractive as in the past. Tax savings has been one of the motivating factors for creation of an FLP, although not the only factor.The basic advantages of an FLP are:1.Control. The FLP allows the owners of assets, generally the parents, to transfer the ownership of assets to family members, but at the same time maintain control. Individuals who have accumulated significant assets desire to monitor or control the use of those assets even though they often do not wish to retain the ownership of the property. The FLP therefore effectively provides to the general partner (parents) a method to control the assets within the partnership, even though other individuals (children) may become the owners of the interests in the partnership.2. Asset Protection from Creditors. The creditor of a limited partner is not entitled under the law to become a limited partner and therefore cannot effectively take ownership to the limited partnership asset. A creditor is entitled to receive income distributions from the partnership interest, but not the partnership interest itself. Since the general partner can control the timing of distributions it may be difficult for a creditor to attach even the earnings from the partnership. This benefit has to be very carefully handled, however, to avoid charges of defrauding creditors.3. Asset Protection from a failed marriage. If the child’s limited partnership interest is owned solely by the child, and cannot be taken over by another under the law, it may be difficult in a failed marriage for the spouse to secure partial ownership of the asset.4. Estate/Gift Tax Savings. One of the traditional FLP goals is to reduce federal income tax of high income individuals by redistribution to other family members. As stated, however, recent tax law changes reduce the benefits of this goal.5. Avoiding Probate. Property placed into the FLP are removed from the estate of the parent. Accordingly, for any asset of the parent placed into the FLP there is no need for probate. Some of the disadvantages of a Family Limited Partnership are:1. Cost. A FLP can be fairly costly to set up, register with the State of Kansas, pay annual fees, and operate appropriately as a business. For estates with lessor value or not involving family businesses, different types of estate planning entities, such as living trusts, can be created less costly.2. Government restrictions and regulations. Limited partnerships must strictly follow statutory rules for being established, must register with the State, and must maintain a good standing with the state of Kansas. In addition, limited partnerships must follow certain rules and guidelines established by the Internal Revenue Service. None of these governmental regulations are onerous or difficult to follow, but it must be kept in mind that all governmental rules relating to limited partnerships must be followed.3. Lack of marketability. Except for transfers between limited partnership members, i.e., family members, creation of the family limited partnership and placing assets into it can definitely hinder the marketability of an individual limited partner’s interest.Family Limited Partnerships as an estate planning device certainly are not for everyone. They are most advantageous in larger estates and/or family business situations. In the right situation, however, FLPs are a very worthwhile estate planning device.