When it comes to estate planning, the risks of value erosion due to taxes and the loss of control over transferred assets can significantly impact your financial legacy. Passing wealth to younger generations without a solid strategy might lead to mismanagement or unintended outcomes – two incredibly costly estate planning mistakes.
A family limited partnership (FLP) can be invaluable in this situation. An FLP offers a way to protect your assets, manage taxes, and maintain control while facilitating the easy transfer of wealth to your heirs.
Understanding FLPs can be a game-changer whether you aim to preserve family wealth or streamline estate planning.
What is a Family Limited Partnership?
A family limited partnership (FLP) is a legal entity that allows family members to pool and manage assets under a structured agreement, often used for tax efficiency, asset protection, and wealth transfer.
Forming an FLP entails drafting an agreement that outlines the roles, responsibilities, and ownership structure of the partnership. Assets such as real estate, investment portfolios, or business interests are transferred to the FLP.
In return, family members receive ownership interests in the form of general or limited partnership shares, which define their level of control and liability. Money is disbursed to partners through distributions, which the partnership agreement typically defines.
General partners versus limited partners
FLPs divide ownership into two roles: general partners and limited partners. General partners have complete control over the FLP, including managing assets and making decisions. They also bear unlimited liability.
On the other hand, limited partners provide capital or assets to the FLP but have minimal control over its operations. Their liability is kept to the extent of their investment, protecting them from broader financial exposure. This structure enables families to centralize asset management while maintaining decision-making in the hands of trusted individuals.
FLPs are particularly beneficial for transferring assets to younger generations in your family. Parents or other senior members can act as general partners, retaining control over investments or business interests while transferring ownership interests to children as limited partners.
Through an FLP, your family can mitigate tax liabilities and safeguard assets from creditors. It also lets you manage wealth according to your vision – all while preserving family harmony through clearly defined roles.
Family Limited Partnership Pros and Cons
You should be aware of its advantages and disadvantages when deciding if an FLP aligns with your financial goals.
Advantages of FLPs
An FLP can have a significant positive impact on your estate.
- Tax advantages
FLPs allow you to transfer assets at discounted values, reducing gift and estate tax burdens. Additionally, you can distribute income generated by the FLP to family members in lower tax brackets. This arrangement makes it an ideal strategy for preserving wealth across generations.
- Asset protection
Assets held within an FLP are shielded from personal creditors, providing valuable protection for your family’s wealth. Such protections can benefit high-value assets that might otherwise be vulnerable to lawsuits or financial disputes.
- Management control
As a general partner, you retain full authority over managing FLP assets, even when ownership interests belong to other family members. You can have peace of mind that your family will uphold your financial vision.
Disadvantages of FLPs
As with any other strategy, FLPs also pose some drawbacks to consider.
- Complicated setup
Establishing an FLP requires detailed legal documentation and compliance with strict regulatory standards, often necessitating professional assistance. Without proper guidance, mistakes in setting up the FLP may undermine its effectiveness.
- High maintenance
FLPs demand ongoing administrative work, such as annual filings, financial record-keeping, and adherence to partnership agreements. Neglecting these responsibilities may incur penalties or even dissolve the partnership.
- Loss of control for limited partners
Limited partners have a minimal say in decisions, which may cause frustration if family members feel excluded from important discussions. They might also miss out on the experience of directly managing your assets, which can hinder their confidence when they eventually hold the reigns.
Practical Uses of an FLP in Financial Planning
An FLP is not just a tax solution; it’s a versatile strategy for achieving other financial planning goals if your family has complex asset portfolios.
Reduce estate taxes efficiently
You can significantly lower estate taxes by transferring ownership interests in the FLP to younger generations at discounted valuations. For example, fractional ownership discounts can optimize tax savings by reducing the taxable value of assets like real estate or family businesses.
Transition family businesses smoothly
FLPs allow you to transition ownership of a family business while retaining operational control. As the general partner, you can manage day-to-day operations while gradually transferring equity to successors for a stable and seamless transition.
Consolidate and manage investments effectively
FLPs are ideal for pooling and managing family investments under a single entity. Combining wealth simplifies asset management and enables a unified investment strategy, ensuring that family resources are preserved and grown with minimal duplication of effort.
Family First, Finances Second (But Smartly!)
Estate planning doesn’t have to mean losing control over your wealth or leaving its future to chance. Without a will, you risk exposing your family’s financial security to unnecessary complications and uncertainties. Thankfully, family limited partnership offers a solution to these concerns.
The beauty of an FLP lies in its balance—it gives you the structure to keep growing your wealth amidst today’s challenges while ensuring your family’s financial security for generations. Whether it’s safeguarding a family business, consolidating investments, or minimizing estate taxes, this type of partnership empowers you to plan strategically and confidently.
That said, implementing an FLP requires precision and expertise. Financial maneuvers like these are best undertaken with professional guidance. Consulting with a financial advisor ensures your strategy aligns with your broader goals while adhering to legal and tax frameworks.
Tencap Wealth Coaching offers this service through Greg Black, a Certified Financial Planner® in Utah. Learn how our advisory services are more than worth the fee when building a strategy that protects and grows your wealth.
The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Utah or where otherwise legally permitted. All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication of future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Purchases are subject to suitability. This requires a review of an investor’s objective, risk tolerance, and time horizons. Investing always involves risk and possible loss of capital.
Greg Black, CFP®, ChFC®
Greg Black is the owner and founder of Tencap Wealth Coaching, an independent investment advisory firm founded on academic investing principles. As a Certified Financial Planner, Greg takes an educational approach to helping his clients be settled and responsible with their financial circumstances. Greg specializes in helping his clients create a proactive plan to minimize the exposure of market conditions while still harnessing the incredible power of global financial markets.
Greg specializes in "complexity" and is skilled at turning a complicated situation into an organized strategy for the families he serves. Greg, and each advisor of Tencap, is a stated fiduciary. You never have to wonder if your best interest is being served. Greg has been transforming the investor experience since 2012.
