Overview of the Family Limited Partnership

By Jakob Jelling
www.cashbazar.com

A family limited partnership is like a corporation and is used to keep the family assets in the family. The family limited partnership comes into existence when a certificate is filed with state authorities. The partnership can own assets and can engage in activities that a normal individual does. It has a distinct identity and a tax identification number. Partners own the family limited partnership and partners are categorized as general partners and limited partners. The family limited partnership in the past decade has found favor with people for asset protection and estate planning. It is now successfully used to discount the value of estates by more than 80 percent.

For example, a father and mother put their assets into a family limited partnership. They are the general partners and own 75% of the partnership. They then gift 25% of the partnership to their children by giving them limited partnership interests. The father and mother would thus control the partnership but their children will own 25% of the all income and profit.

All general partners have a percentage of ownership, voting powers and are allowed to manage the matters related with the partnership. This includes matters of investment and distribution among partners and also the responsibility of liabilities. Limited partners only have a small percentage of ownership. They do not have management participation rights and they also do not have voting powers. A limited partner is not liable for any activities of the partnership.

The advantage of a family limited partnership is that the general partner is in control of the finance and assets. It is the sole will of the general partner that determines the distribution of income and profits. If the general partner feels that the profit should not be distributed but should be reinvested he can do so. In this type of partnership the limited partners are restricted from squandering the family fortune, as they cannot sell or transfer it. Similarly, if a limited partner is a creditor the partnership protects from the limited partner’s creditor levying on the assets. Another advantage with family limited partnership is the discounts it can get. Arbitration to settle disputes, protection from unwanted persons becoming partners, and protection from problems arousing from a failed marriage of one of the limited partners are the other major advantages. Family limited partnership reduces administrative cost and the flexibility it provides allows to terminate or amend a partnership easily.

Minority discount is the greatest advantage associated with family limited partnerships. Minority discounts of up to 40% are given to limited partnership gifts. This is due to their lack of control and marketability. The taxing of a family limited partnership is same as in a regular partnership. But if the partners want it to be altered it can be done by a mutual agreement. The tax returns must be filed with the federal government.

Like all partnership deals no loopholes should be left in the agreement. The partnership should be qualified under federal tax law. Distribution of the income and expenses of the partnership should be taken care of properly. Before entering into agreement the general partners should properly understand the tax system. This is to avoid complications in the future.

If utilized properly family limited partnerships are ideal for estate planning and for asset protection.

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