Tag: Family Limited Partnership

3 Takeaways: 40th Annual Estate Planning Conference

The 40th Annual Estate Planning Conference, held as usual in Kiawah Island, South Carolina, just concluded. Below are three takeaways we believe you’ll find useful in your practice.

FLP Entities

John W. Porter, an experienced tax litigator with Baker Botts LLP in Houston, Texas spoke on several topics including family limited partnership style entities. There were a number of takeaways but a good summary is still “respect the entity.” Too many families treat these as personal bank accounts rather than business entities and do not get the results they hoped for. If your clients have these LLCs or LPs and still desire the benefits that led to their creation, encourage them to have at least an annual meeting with their advisors to help ensure that they are operating the entity as a business.

Kaestner

We’ve written before about the US Supreme Court decision that ruled North Carolina’s attempt to tax trust income merely on the basis of a beneficiary residing in North Carolina unconstitutional. N.C. Dept. of Revenue v. Kimberly Rice Kaestner Family 1992 Family Trust, U.S. Sup. Ct. No. 18-457 (June 21, 2019). The important planning opportunities going forward will involve advisors looking at the three factors that states basically use to determine whether they will tax a trust’s income and then assisting their clients in making strategic decisions accordingly. The three considerations that normally are involved in state income taxation of trusts are the location/residence of: (1) Grantor; (2) Trustee/Trust Administration; and (3) Beneficiary(ies).

Grantor Trusts

A third takeaway also comes from Porter and I’ve heard this called the “greatest estate planning technique” at various CEs for about the last 10 years. The technique is grantor trusts and it is indeed very powerful. If you want to make a gift outside the tax system, you normally need to keep it under the annual exclusion limit. With a grantor trust, however, you are allowed to pay all the income taxes for the trust and not report it as a gift. Trust assets (and other assets for that matter) grow quickly without the drag of income taxes. Mixing this technique with the magic of compound interest, many of us have seen this become so impactful that even very affluent clients eventually decide to turn it off and stop transferring wealth to younger generations with it. Furthermore, as Porter reports, the IRS really can’t attack it.

*Intended as general guidance only and not as legal advice.

Family Limited Partnership: F.A.Q.

A Family Limited Partnership (“FLP”) is a structure that is known for two main purposes: asset protection and tax minimization. Its ability to handle both of these important wealth generators puts it in the running as one of estate planning’s most valuable tools, if implemented and maintained properly.

Below, you will find some frequently asked questions that we receive from our clients regarding FLPs.

(1) What is an FLP?

An FLP is a limited partnership in which all the partners are family members or entities created by or owned by family members. A limited partnership is a business entity that consists of at least one general partner and at least one limited partner. Today, limited liability companies (LLCs) are commonly used in place of limited partnerships to accomplish all of these same purposes, even though the acronym “FLP” has stuck.

(2) Who is in charge of the FLP?

It varies, but often parents or grandparents. Children or grandchildren are more often limited partners (or Members) with less control.

(3) What type of asset goes into an FLP?

A common asset to fund an FLP is an investment account that isn’t normally touched on a day-to-day basis. Other assets that are great to fund an FLP are investment real estate and, potentially, stock of a closely held company. However, it is important to remember that stock in an S-Corporation should not be transferred to an FLP, as partnerships are not permissible shareholders of S-Corporations.

(4) How does an FLP protect my assets?

In the event you are sued or attacked by creditors, assets in an FLP will be protected against any liability you may face individually. An FLP is a great way to protect assets with large values for those whose professional careers are prone to lawsuits. Since you technically don’t own the asset transferred to the FLP, creditors generally cannot reach that asset.

(5) How can an FLP help me reduce my tax obligations?

By transferring assets to an FLP, you no longer own the asset individually. The only asset included in your gross estate upon your death is your ownership interest in the FLP. The interests in the FLP can be attractive for tax reasons because of certain discounts they receive, such as discounts for transferring minority interests in the FLP as well as for the lack of marketability the FLP interests have. These discounts are favorable for transferring interests in the FLP to children or grandchildren at a reduced value, thus saving on gift taxes.

If you are interested in forming an FLP to protect your assets or potentially reduce taxes, please contact us to speak with one of our attorneys.

 

** The information contained in this communication is not intended to constitute legal, accounting or tax advice.