Family limited partnerships

From Wikicpa

The family limited partnership (FLP) is based on the idea that valuation of a limited partnership interest is less than the value of the proportionate interest in the underlying assets. This disparity in value makes the FLP the ideal vehicle for both lifetime transfers and those occurring at death.

Background

The arrangement is often structured so that senior family members transfer property to the FLP in exchange for a nominal general partnership interest (e.g., 1%) and a substantial limited partnership interest (e.g., 99%).

The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither buyer under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts.

A minority interest discount is usually available for a closely held business interest when the interest lack material control of the business; that is, when the interest is subject to the control of the others owners. This discount is generally available for both estate and gift tax purposes for partnership interests. A discount for lack of marketability is available to reflect the fact that closely held interest is less attractive to a third party by reason of the difficulty of selling the interest without an established market. This discount is generally available to both majority and minority interests in a closely held business.

Business Purpose

The formation of a FLP must carry a valid business purpose. The continuence of a family business is a valid purpose.

• A valid business purpose has been found in making an asset more easily divisible in anticipation of making lifetime gifts
• A valid business purpose in a transfer of real estate to a separate corporation for an intended spinoff acceptable.

Estate planning advantages

• Asset Protection: FLP's limit liability exposure by offering creditor and predator protection and partnership interests can be protected from divorce claims

• Efficient Wealth Transfer: FLP's provide a convenient method to transfer wealth between generations.

• Financial Tutelage: Direct wealth transfers to beneficiaries could hinder personal development. By implementing a family business structure, a benefactor could promote incentives and values to beneficiaries.