Does your estate plan have a Family Limited Partnership?

Families with a high net worth may use a Family Limited Partnership (FLP) as part of their estate plan. This legal structure can be designed to provide three distinct advantages:

  • Tax savings. The owner can have an FLP structured to reduce tax obligations. For example, the FLP may have five different family member owners. The Internal Revenue Service (IRS) would only expect each owner to bear responsibility for a portion of the tax obligation of the asset, as each individual owner would not be able to control distribution of the asset.
  • Control. The creator could also choose to draft the FLP to provide a single owner with control over the asset held in the FLP. This would allow the individual to give away the benefit of the asset while still guiding investment decisions.
  • Asset protection. If drafted wisely, the owner can protect the asset from potential litigation. Examples include lawsuits by creditors or divorce proceedings.

Although beneficial, these legal tools can be thwarted if proper formalities are not followed. Common examples include commingling the FLP or LLC structure with personal assets and failing to have proper documentation and signatures in place.

How can I better ensure our FLP meets the intended advantages? A regular review of your estate plan can help to better ensure the formalities are in place and the legal structures are serving their purpose. If an error is present, a review can find the problem and you can make the changes needed to better ensure you have the legal structures in place to meet your wishes.

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