Family Limited Partnership
On behalf of David Whitlock at Whitlock Canter LLC
FLP & Estate Planning Attorneys in Paramus, New Jersey
A Family Limited Partnership (“FLP”) is a separate legal entity created by a Client that is often funded with the Client’s liquid investments and investment real estate. The FLP is used in estate planning as a technique that allows gifts to be made at discounted values (roughly 25%) to family members. In addition, the FLP provides the important benefits of creditor protection and centralized management.
A FLP has a general partner and limited partners. Typically, Whitlock Canter LLC of Paramus, NJ forms Delaware Limited Partnerships (because Delaware partnership law contains important features friendly to tax law and creditor protection law). A Limited Liability Company (“LLC”), often formed and owned by the Client’s children, typically serves as the General Partner of the FLP and owns 1% of the Family Limited Partnership’s equity. The Clients who initially fund the Family Limited Partnership start out owning 99% of the FLP equity as limited partners.
Because the Client has exchanged investment assets for a limited partnership interest in the FLP any future creditors of the Client and can merely get a “charging order” against the Client’s limited partnership interest. A “charging order” means that a creditor will only receive satisfaction of a judgment against the Client if the FLP authorizes distributions from the FLP to its partners.
Since the limited partner has little say in the management and cash flow from the FLP, the value of a limited partnership interest in a FLP is less than its proportionate share of FLP assets. This is often referred to as a “valuation discount” in estate planning. As such, if a Client dies with a limited partnership interest in a FLP, a skilled law firm, such as Whitlock Canter LLC, can defend valuation discounts in the range of 25% for estate tax settlement purposes.
FLPs are very useful if a Client is willing to make significant lifetime gifts to family members. A percentage interest in a properly formed FLP is an excellent candidate to be used in conjunction with more sophisticated estate planning techniques, such as a Grantor Retained Annuity Trust (“GRAT”) or a “Sale to a Grantor Trust”.
FLPs are under attack by the Internal Revenue Service and there has been a lot of litigation about the level of valuation discounts that are appropriate. In August 2016 the IRS issued Proposed Regulations to eliminate all valuation discounts for family owned entities. They will not be effective until they are finalized. Many taxpayers are making gifts of these interests before the Regulations are finalized. If you own any such family owned entities, we can help you achieve tax savings for your family with a carefully crafted estate plan. If the proper procedures are not followed in administering a FLP, the Internal Revenue Service is likely to seize upon this weakness and deny valuation discounts upon audit. For this reason, it is important to have the guidance of a skilled estate planning attorney and certified public accountant when using this technique.