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