Estate Planning – the best tool that keeps you in total control of the estate until your death.
The Family Limited Partnership
Everyone knows something about Trusts and they know little about anything else that might protect their assets and avoid probate. A Trusts does its job. That job is only to avoid probate. That’s important, but we live in times when there is more to fear than simply the costs of probate. You don’t need a grandiose estate to realize that there are those who will sue you for your assets with little or no cause. There are those who will lie and cheat and pursue your assets at all cost to you and your loved ones and you don’t have to die first in order for that to be waged upon you and your loved ones. ” What is the solution”, you may ask. The family limited partnership!
Estate Planning that covers much more than just probate.
Don’t try this on your own. Most family matriarchs and patriarchs are not skilled in matters of estate planning options and legal processes. Please consult with your financial adviser, attorney or accountant who is skilled in business matters, tax matters and estate planning.
Goal: To establish an instrument that will provide the required balance between two contradictory goals: that of maintaining tight control of assets while alive and also minimize if not avoid estate taxes and probate. The Family Limited Partnership, often referred to as an FLP will not only accomplish these two goals but also provide protection from lawsuits, liens and other attacks on your assets. Therefore the FLP reduces income and estate taxes and does so in a protective manner. It also protects assets from divorces, creditors and lawsuits. The FLP also allows continuous family ownership of the assets.
An FLP is a legal entity that stands separately from you and your heirs. You don’t own shares in it like you would in a corporation. Instead, its members own ‘interest” in the partnership. An FLP is simply a limited partnership with members who are all part of one family. It is made up of you, your spouse, if applicable, and your children, grandchildren and other related heirs.
The FLP is an entity controlled by a general partner (GP). The GP is responsible for all decision-making, from minor clerical work and accounting duties to major decisions like asset sales/purchases and partnership distributions.
The GP typically only holds from 1% to 5% of the total ownership in the limited partnership; however, they wield complete control over the underlying assets.
The remainder of the ownership, up to 99%, is held by the heirs, the Limited Partners (LPs). LPs are “limited” in that they don’t get to make any decisions. They are completely passive members.
Why would a partner give up decision-making power? The answer is liability. In a limited partnership, the limited partners are shielded from liability if the partnership is sued.
Is an FLP seldom sued? Usually never! Why? The short answer is, The Charging Order! You see, when someone is wanting to sue you, the first thing they do is hire an attorney and do an asset search. When they discover that the assets are held in an FLP, they generally back off, and fast. In American courts, suits are generally for far more than any possible injury and the large amount generally is established around an attorney’s ability to get a settlement and a large payment for his firm. Therefore, it doesn’t matter if the lawsuit is legitimate or if there has been a breach of any kind. It is simply almost always about extorting money from someone. Whether or not there has been an injury, the lawsuit is for a huge amount of money. When a lawsuit is filed against an FLP, the amount of the lawsuit immediately becomes taxable income to the plaintiff, the one filing suit. This is known as the charging order! Lawsuits are often conducted over many months, even years before a settlement or payoff is made. Consequently, the suit never comes about.
Why is it an easy solution to probate or to estate taxes, commonly called death taxes? The ownership occurs at the time that the partnership is setup. When the GP expires, the remaining partners carry on business as usual. There is an understanding as to who will take over as the new GP. That person is generally denoted by having the larger percentile and then he can re-assign the membership interests, moving himself into a one to five percentage member and assigning his excess interests to his children or whomever he selects. He then maintains control and the others retain a limited interest in the estate. No need for an attorney, for probate or to pay any special taxes. Interests in the FLP can be gifted over the years prior to the death of the original GP.
Setting up an FLP
The senior generation creates an FLP and becomes its general partner (GP). The FLP becomes the owner of whatever assets the general partner places in it. In exchange for contributing there assets to the FLP, the GP receives 100% of the interest in the FLP. FLP’s can hold stocks, bonds, bank accounts, mutual funds, real estate (in the form of REIT’s) and life insurance policies as well as other family heirlooms and assets like gold, silver, fine art, and other collectibles or even just personal property such as furniture, fixtures, equipment, electronics, and so forth.
Because the whole point of this exercise is to provide for the next generation, the GP gives away poritons of its interest in the FLP to the members of the next generation. If there are 19 heirs, perhaps the GP will decide that each LP will ultimately receive 5% ownership of the FLP with the GP retraining 5%. The general partner distributes the ownership interest to the LPs over time according to annual and lifetime gift tax exclusions. LP’s can be children, grandchildren and even great grandchildren. Any of these heirs can also contribute monies or loans to the FLP or transfer certain items into the FLP themselves, though it is not common for this to occur.
Further consideration for setting up the FLP is the matter that if the wording is specific, control can be transferred gradually to a new GP over time. This can occur while ownership percentages stay the same. This can be especially helpful if the original GP slowly becomes incapable of controlling the FLP and is reluctant to giving up control. He or she is not faced with the decision of stepping aside at a given age, as it automatically hands off to the next GP over time and by a designated date or event or age of the original GP. It is understood early in the stages of the creation of the FLP and not up for any debate in later years. You might say that this method of estate planning is also a peace keeper!
If your estate is complex and includes businesses and investment properties, be prepared to setup more than one FLP to best protect the assets and to better distribute the ownership. Trusts can be used in conjunction with the FLP and corporate entities to protect and distribute ownership interests and liabilities.
When putting together an FLP, seek the help of experienced legal and/or tax counsel. Be sure your FLP is structured properly for tax purposes and for ease of transfer upon death or growth of assets.
GIFT TAX – Don’t waste the gift tax exclusion.
You can give a gift of present interest up to $14,000 for years 2016 or 2017 to each donee or ($26,000 for the year if filing jointly) if your spouse agrees, to your children, grand children or others without any gift tax consequences. Giving away fractional shares of appreciating real estate in this manner, you fully avoid gift tax if the value of the interests each year is below the maximum for that year. You might want to have a current appraisal of the property. You may be able to give away 100% of the value over time and free of tax while reducing the size of your estate. In certain circumstances, give away full value in a single year.
The maximum estate exclusion for 2016 is $5.450,000; $5,490,000 in 2017 plus the aggregate deceased spousal unused exclusion (DSUE) amount, if applicable.
Contact your tax accountant for a personal consultation.