We all wish to avoid taxes or maybe in a way limit tax burdens. For every family that has amassed a substantial amount of wealth and do care about protecting it for multi-generational purposes, it might be rewarding to look into Family limited partnership (FLP).
As the name implies, a Family limited partnership, or FLP, is a limited liability partnership controlled by members of a given family. FLPs feature two types of partners:
General partners usually own the largest share of the business and they are responsible for day-to-day management tasks while limited partners have no management responsibilities. They instead buy shares of the business in exchange for dividends, interest, and profits the FLP may generate.
The FLP basically offers benefits for asset protection, estate planning, and tax minimization. In order to appropriately maximize all of the benefits under FLP, it will be wise to consult experts in the realm of real estate and financial planning.
Over the years, high-net-worth individuals have considered FLP due to the benefits of allowing its subscribers to transfer wealth within the family while minimizing transfer taxes in the process. In other words, the primary advantage of an FLP is that it could, under the right circumstances, help you avoid estate and gift taxes when passing assets on to children or grandchildren. Under an FLP, your family’s resources are pooled into a single business partnership, whose shares can be distributed to future generations at a lower tax rate than what you’d pay in estate or gift taxes
Can FLP serve as a tool for asset protection? Yes, FLP can serve as a tool for asset protection when implemented properly. By implementing properly, this means you will have to follow certain precautions. Some of which include:
- Keep accurate records of transactions, investments, sales of property, etc. Keep these records separately from your personal records.
- Do not commingle FLP assets and other assets. Do not pay for personal expenses from the FLP accounts
- Keep minutes of the annual meeting, and any other meeting. You don’t need a lawyer to record the minutes; keep a log in plain English of what was discussed, and what was decided by the partners
- Have annual meetings. Annual meetings need not be formal in form, and can occur over brunch or at Thanksgiving dinner.
- Each FLP should have its own bank account. Use this account to pay for FLP expenses, such as annual renewals
*** There are more formalities than those listed in this article that must be strictly adhered to if you want to reap the full benefits of FLP. Consult with your estate planner or financial planner today to get you started.
FLP may seem all rosy and attractive; however, it does have its own drawbacks.
- Carelessness and failure to abide by the above-listed points may lead to a creditor undoing, or the IRS challenging, many of the benefits of an FLP.
- Unlike corporations and trusts, general partners are not insulated from potential lawsuits, judgments, or creditor seizures. The parents, as general partners, are 100% in control of the assets and 100% responsible for a potential lawsuit. General partners have no asset protection in these cases.
- It is usually difficult to transfer ownership to children under the age of 18 (usually away in school) and one of the requirements of FLP is that partners must be able to play a role in the day-to-day management and operations of the business.
Establishing a family limited partnership is usually a complex estate-planning strategy, made even more complicated by the uncertainty of the regulatory environment. A wise and smart choice will be to consult with qualified and experienced professionals who know how to go about sustaining multi-generational family wealth.
As part of our business values at the Kathy Chan Real Estate group, we pride in our ability to diligently work with our client based on their realistic wealth management goals. Depending on your financial background, asset owned and value of wealth, we can work with you to decide if FLP or any other wealth protection technique is the best for you. We have been doing this for years with tons of positive reviews from numerous families based in the San Francisco Bay Area and beyond.
Visit our core service page to learn about us, what we do and how we can help you maximize the benefits of suitable wealth protection plans. Let’s help you and your families maximize wealth through our expert ideas.