Family Limited Partnerships

Family Limited Partnerships - Tops Rated Family Limited Partnerships Lawyer - Family Limited Partnerships Attorney

A Family Limited Partnership (FLP) is a special legal vehicle that can preserve a family business for future generations while helping to shelter assets and reduce overall gift and estate taxes. FLPs are commonly used as part of business succession planning, business continuity plans, and often serve as an integral component of an estate plan for high net worth individuals.

A New York high net worth estate planning attorney can provide valuable assistance in establishing and managing a Family Limited Partnership (FLP). At New York Legacy Lawyers, our attorneys can guide clients through the intricate legal process involved in forming an FLP, including drafting the necessary partnership agreement and filing the required documentation with the relevant authorities. Additionally, we provide tailored advice on structuring the FLP to achieve your specific estate planning goals, such as minimizing estate taxes, protecting family assets, and facilitating wealth transfer to future generations. To learn more, schedule a consultation by contacting us at (718) 713-8080.

A Family Limited Partnership is typically established by married couples who place assets in the FLP and serve as its general partners. They may then grant limited-partnership interests to the children, of up to 99% of the value of the FLP’s assets. When this occurs, the assets are removed from the general partners’ estates, thus saving on future estate taxes. The general partners keep control of the FLP and its assets, even though they may own as little as just 1% of the asset’s value.

Limited partners may receive distributions from the FLP, and enjoy certain tax benefits. Asset protection is another attractive feature of the FLP. The partnership’s assets are shielded from the limited partners’ creditors. The interests in a FLP can be easily divided among family members, who may each own different amounts. The FLP enables ownership of a business to transfer to the younger generation, while allowing the senior generation to continue conducting operations and mentoring and grooming the young owners.

One of the significant benefits of a properly established and maintained FLP is that it can reduce the value of gifts to your children and grandchildren. The value of each limited partnership interest which you give away decreases the value of your taxable estate and, consequently, any tax which your heirs would have to pay upon your death. The gifts are made using the annual gift tax exclusion, so you may not have to pay any gift tax on the transfer.

Since limited partners do not have the ability to direct or control the day-to-day operation of the partnership, a minority discount can be applied to reduce the value of the limited partnership interests which you are gifting. Therefore, the value of the partnership interests transferred to your beneficiaries may be far less than the corresponding value of the assets in the partnership. Furthermore, because the partnership is a closely-held entity and not publicly-traded, a discount can be applied based upon the lack of marketability of the limited partnership interest. This allows you to leverage the FLP as a vehicle to transfer more wealth to your beneficiaries, while retaining control of the underlying assets.

With these significant tax benefits, it’s no surprise that many FLPs have attracted scrutiny from the IRS. Many have run into various problems due to mistakes or outright abuse.

Care must be taken to ensure your FLP is properly established and operated. Specifically, the IRS may look at the following issues when assessing the viability of the FLP:

Considerations for FLPs Description
Non-Tax-Related Reasons Besides tax savings, FLPs should have significant, legitimate non-tax-related purposes for creation.
Exclusion of Personal Assets Personal assets like cars and residences should not be included in the FLP.
Appraisal by Qualified Professional Assets transferred to the FLP should be professionally appraised by a qualified appraiser.
Balancing Asset Inclusion While maximizing benefits is tempting, careful consideration should be given to the FLP's size.

What is Limited Partnership?

In a limited partnership, the liability of “limited partners” is restricted to the amount of their investment in the partnership. Within a limited partnership (LP), there must be at least one “general” partner who assumes personal liability for the partnership’s debts and takes responsibility for making business decisions. Furthermore, there may be one or more “limited” partners who provide capital to the business but possess limited authority in the day-to-day operations and decision-making processes. Limited partners, similar to shareholders in corporations or members of an LLC, benefit from the protection of limited liability.

Similar to general partnerships, limited partnerships pass their profits through to the partners, who are responsible for reporting and paying taxes on their respective individual tax returns.

One advantage for limited partners is that they generally do not need to pay self-employment taxes. Since limited partners are not actively involved in managing the partnership on a daily basis, their share of partnership income is not categorized as “earned income” for the purpose of self-employment taxes. However, it’s crucial to note that limited partners could risk losing their limited liability protection if they exceed their passive role and become actively engaged in the partnership’s operations.

To establish a limited partnership in New York, two requirements must be met: (1) an agreement between at least two individuals to establish and operate the limited partnership, with at least one person serving as a general partner and at least one person as a limited partner, and (2) the general partner is required to both execute a partnership agreement and submit a certificate of limited partnership to the New York Department of State.

If you’re looking for assistance in establishing a Limited Partnership (LPs), a New York high-net-worth estate planning attorney can offer valuable support. At New York Legacy Lawyers, our attorneys can guide you through the process of creating partnership agreements, ensuring legal compliance, and submitting required documentation to the relevant authorities. To schedule a consultation, reach out to New York Legacy Lawyers at (718) 713-8080.

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