West Michigan Estate Planning Center

Benefits Presented by a Family Limited Partnership: Could It Work for Your Family? – West Michigan

The IRS does not like them, but for wealthy families, this kind of limited partnership is an effective means of transferring wealth within a family, while minimizing taxes. You’ll need to work with an experienced estate planning attorney who is familiar with family limited partnerships to do this correctly.

By establishing a business entity to hold assets that would otherwise be subject to transfer taxation, family limited partnerships are used by wealthy families to minimize tax liabilities, according to an article in ThinkAdvisor, “Estate Planning: The Family Limited Partnership Strategy.” The article examines a recent decision in U.S. Tax Court, known as Purdue, which held that a family business entity formed for non-tax reasons is permitted and using it to minimize transfer taxes is acceptable, even though that was one of the reasons that the entity was created.

The Purdues had five children and several grandchildren and great-grandchildren. Their estate was worth about $28 million, much more than the current $5.49 million per person estate tax exemption amount. The couple funded a Purdue Family LLC with about $22 million in marketable securities and other assets and, at the same time, created a trust to benefit the Purdue’s descendants and spouses. The trust was funded with interests in the LLC in proportion to the gift tax annual exclusion each year. Each beneficiary could withdraw up to the gift tax annual exclusion amount or a per capita share of the assets transferred each year. The LLC’s operating agreement spelled out some non-tax reasons for creating the LLC, such as

1. Avoiding fractionalizing ownership;
2. Retaining assets within the extended family;
3. Protecting assets from future unknown creditors; and
4. Providing flexibility in managing the assets that wouldn’t be available in other entities.

 

When Mr. Purdue died, he created a bypass trust, a qualified terminable interest property (QTIP) trust and a GST-exempt trust—each of which owned a portion of the LLC. Mrs. Purdue and her husband had retained the right to income and distributions from the LLC assets, although the decedent had approximately $3.25 million outside of the LLC and trusts. After the decedent’s death, the IRS attempted to collect more than $4 million in estate taxes and challenged the LLC structure. Trust beneficiaries and the QTIP trust loaned the estate funds to pay the estate tax. The estate attempted to deduct interest paid on the loan, but the IRS challenged this.

 

Tax Code § 2036 stipulates that property transferred to a trust, in which a decedent holds an ownership interest, will be included in his or her gross estate, except when that property is transferred for adequate consideration. The estate was also required to show that there were valid non-tax reasons for creating the family LLC. The IRS said the LLC was created primarily to transfer wealth to the next generation and to avoid taxes.

However, the Tax Court did not agree with the IRS. Seven non-tax reasons for creating the LLC were found to be compelling and acceptable for the existence of the LLC. They included:

• Relieving the decedent of having to manage the investments;
• Consolidating investments with a single advisor to reduce volatility under a written investment plan;
• Educating the children to jointly manage an investment company
• Avoiding repetitive asset transfers among multiple generations
• Creating common ownership of assets for efficient management and meeting minimum investment requirements;
• Providing voting and dispute resolution rules and transfer restrictions;
• Providing the children with a minimum annual cash flow.

It is worth repeating that these are complex legal entities and require the help of a sophisticated legal professional who is experienced in the formation of Family Limited Partnerships. Ask your estate planning attorney at Cottrell & Jacobs, if an FLP is appropriate for your situation.

Reference: ThinkAdvisor (March 14, 2017) “Estate Planning: The Family Limited Partnership Strategy”

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Drawbacks of Family Limited Partnerships - West Michigan

Family limited partnerships seem like an almost foolproof idea: A client can shield just about any amount of money from creditors while maintaining full control of the assets, and getting tax advantages to boot. But they’re not for everyone, and there can be serious pitfalls to an FLP that is carelessly invoked or improperly constructed.

Family Limited Partnerships, or FLPs, can help protect your assets from personal creditors and allow you to maintain control of the assets during your life. FLPs create a separate entity in which you can place an almost unlimited amount of assets. You can then give your family members limited partnership interests in the entity.

A recent article in Life Health Pro, titled “6 Pitfalls That Clients Eyeing an FLP Need to Consider,” points out the potential drawbacks of an FLP:

• Expense – Creating an FLP can be very expensive as      anything placed into the FLP will need to be appraised.
• Limitation on Asset Types – Some assets are not      well-suited for an FLP, including residential property and some types of      securities.
• Puts Conflicts Off – Just putting a family business      into an FLP does not necessarily end any conflicts of the next generation      over that business. You will still need a business succession plan.
• Control of Assets – While you can control FLP assets,      there are limits. You cannot use them for personal expenses.
• Expensive for Children – Having part ownership of the      FLP may subject your children to capital gains taxes they cannot afford.
• Minor Children – You cannot give minors an interest      in the FLP directly. You have to give them a share through a parent or      guardian.

Family Limited Partnerships can be an excellent tool to pass on your business. However, you should consider them as only part of your estate plan and you should talk to an estate planning attorney about whether an FLP is right for you and your family.

For more information about Family Limited Partnerships please visit our website.

Reference: Life Health Pro (July 9, 2014) “6 Pitfalls That Clients Eyeing an FLP Need to Consider”