You may be years away from the transferring of your business to the next generation. Advanced planning provides you with more options and flexibility, resulting in a greater likelihood of your business's continued prosperity and the preservation of your legacy.
Business succession planning is a complex process with various means used, including the implementation of a family limited partnership (FLP) in certain instances. FLPs provide both advantages and disadvantages and that’s why it is important business owners research this option before moving forward.
What is an FLP?
A family limited partnership (FLP) functions similarly to a limited partnership: Family members buy shares in the family business and their profit is proportional to the number of shares he or she purchased.
The FLP’s general partner is typically the parent, who own the largest shares and is responsible for all decisions involving the FLP. Limited partners typically have little to no say involving the FLP’s management and investment decisions.
Advantages of Utilizing an FLP in Estate Planning
Structure - A general partner (usually a parent) maintains control over the FLP, allowing the general partner the ability to manage the FLP. In addition, an FLP may be drafted to include restrictions on the transfer of interest, future amendments, or in response to changes in family members’ circumstances.
Taxation - An FLP is structured in a way that it takes advantage of the IRS annual gift tax exclusion. For example, a general partner can place assets into the FLP and then slowly transfer the interest to family members without running into the problem of gift taxes. The amount transferred must fall within the gift tax threshold for the year. In addition, any future returns generated by an asset placed within the FLP stay within the FLP.
Limited Partners and Creditors - Since family members hold a limited interest in the FLP, general partners must provide consent to creditors who may seek to gain control of the limited partner’s interest. In addition, creditors seeking interest from limited partners are unable to force the FLP to distribute cash.
Disadvantages of Utilizing an FLP in Estate Planning
The FLP is a business - An FLP is a business and all partners involved should have the knowledge to run it.
Asset restriction - Personal assets may not be transferred into the FLP because it is considered a business entity. An FLP is only advantageous to those who have nonpersonal assets to transfer, such as securities and investment properties.
Complexity - Utilizing an FLP is a complex process that may involve several professionals, including an estate planning attorney and tax professional. As the FLP evolves and ages, it is advisable that the general partners continue to consult with their advisors to avoid legal and tax issues.
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