A Family Limited Partnership (FLP) is a legal structure that enables family members to combine assets for investment and business purposes. FLPs offer benefits such as asset protection, and tax reduction, and are commonly used in estate planning and business succession. With their ability to preserve assets across generations, FLPs are a strategic choice for families seeking long-term control over their wealth.
Understanding the Basics of a Family Limited Partnership
A Family Limited Partnership is a specialized business structure often used for wealth management, estate planning, and business succession. It operates similarly to a limited partnership, which includes both general and limited partners:
- General Partners: These partners have unlimited liability and typically manage the business. They are personally responsible for business debts and liabilities.
- Limited Partners: These partners, usually family members, have limited liability and do not participate in the day-to-day management of the business. Their personal assets are protected from the partnership’s liabilities.
In an FLP, all partners are family members, and the structure allows family members to pool assets for business or investment purposes. General partners, often parents or senior family members, retain management control, while limited partners—such as children or grandchildren—receive profits without participating in management.
Benefits of an FLP include:
- Wealth Transfer: Parents can gradually transfer ownership interests to children or grandchildren, which lowers their taxable estate and facilitates wealth transfer while maintaining control over the assets.
- Tax Advantages: FLP interests can be discounted for estate and gift tax purposes due to their limited control and lack of marketability, potentially reducing tax liabilities when transferring assets.
The partnership agreement outlines the terms of the partnership, including how profits are distributed, the roles of partners, and ownership transfer rules. For instance, restrictions may prevent FLP shares from being sold outside the family, ensuring that the wealth stays within the family over generations.
In some cases, limited partners may be promoted to general partners as part of a succession or estate planning strategy. This transition allows greater control and ownership to shift to the next generation. The partnership agreement can be updated to reflect changes in partner roles and responsibilities.
Considerations for Texas Residents
In Texas, Family Limited Partnerships are governed by the Texas Business Organizations Code, allowing families to pool assets for investment, business purposes, and estate planning. FLPs provide asset protection for limited partners, although general partners still bear unlimited liability.
The estate and gift tax advantages of FLPs are particularly beneficial in Texas, where there is no state income tax. FLPs are often used to facilitate wealth transfer, business succession, and maintaining control of family assets across generations. However, it’s important to consult with a Texas attorney to ensure the FLP structure aligns with specific legal and estate planning goals.
Business Ownership and Succession with Family Limited Partnerships
FLPs are a popular strategy for family-owned businesses, allowing family members to buy shares and become general or limited partners. General partners manage the business and bear liability for its debts, while limited partners act as passive investors and are shielded from business debts. Over time, FLPs facilitate the transfer of business ownership by allowing younger generations to gradually assume more responsibility and ownership while senior family members retain control.
Additionally, FLPs also serve as a tool for consolidating family real estate assets, such as multi-unit apartment buildings or property portfolios. As these assets generate rental income and the mortgage is paid off, profits are distributed to the partners. Additionally, placing a family business in an FLP can be an alternative to using a trust, as FLP shares allow family members to maintain control of the business, something that may not be possible with a trust.
Key advantages of using an FLP for a family business in Texas:
- Asset Protection: Personal assets transferred to an FLP are protected from creditors, tax collectors, and lawsuits, with the level of protection depending on whether the partner is a general or limited partner.
- Flexible Investment and Returns: Family members can make different investments in the business, with varying rates of return based on their investment levels.
- Unequal Responsibilities and Compensation: General partners can have differing levels of responsibility and compensation according to their involvement and risk.
- Restrictions on Transfers: The FLP can restrict asset transfers, ensuring that shares are not transferred to an in-law in the case of divorce.
- Tax Benefits: As a pass-through entity, an FLP avoids double taxation, and each partner pays taxes on their share of the business income. Transfers of FLP shares may also qualify for the annual gift-tax exclusion, and any increase in value is typically not subject to capital gains tax.
The flexibility of the FLP structure allows the partnership agreement to be amended to reflect changes in family dynamics or business needs. This adaptability makes FLPs an ideal option for families in Texas who want to ensure the continuity and success of their business across generations.
Family Limited Partnerships and Estate Planning
FLPs are not only valuable for business succession planning but also offer significant benefits in estate planning, particularly for transferring family-owned assets like vacation homes. FLPs can help streamline asset transfers, avoid common family property disputes, and provide asset protection. Here’s how:
- Consolidated Ownership: The family vacation home is transferred into the FLP, consolidating ownership under a single entity rather than dividing it among family members.
- Control Retention: Senior family members, often parents, act as general partners, retaining control over the property’s management and use.
- Limited Partner Ownership: Children or other family members are designated as limited partners, holding ownership stakes but not direct control over the property.
- Expense Allocation: The partnership agreement can specify how costs such as maintenance, taxes, and other expenses are shared among family members.
- Usage Guidelines: The agreement can also establish rules for property use, such as vacation scheduling, to prevent conflicts.
- Transfer Restrictions: Ownership transfers can be restricted in the FLP agreement, ensuring the property remains within the family.
- Asset Protection: By placing the vacation home in an FLP, it becomes protected from the liabilities of individual family members. Creditors cannot seize the property because it is held by the partnership, not by individuals.
- Avoiding Probate: Transferring assets into an FLP can help avoid probate. Since the FLP holds the property, it is not subject to probate proceedings, simplifying the transfer of ownership upon the owner’s death.
Real-Word Example
consider parents in Texas who own a $1 million vacation home in Florida. They transfer the property into an FLP, where they remain general partners, managing the property. Over time, they gradually gift limited partnership shares to their children, using the annual gift tax exclusion to minimize estate taxes. As the children eventually gain full ownership, the family preserves the vacation home as a legacy, bypassing probate and reducing estate tax liabilities.
Using FLPs for Investments
An FLP can serve as a powerful investment vehicle, enabling families to pool resources for greater financial growth.
A well-known example of this strategy is Warren Buffett, one of history’s most successful investors. In the 1950s, he launched a partnership with just $100 of his own money, bringing in funds from family and friends. While his partnership wasn’t strictly an FLP, it demonstrates how families can leverage similar structures to invest collectively, amplify their capital, and benefit from shared profits. Additionally, FLPs offer key advantages such as asset protection and potential tax benefits.
Buffett’s approach also highlights the flexibility of partnership agreements within an FLP. One of his limited partners earned 4% of total investment profits, while the remaining gains were divided 75% to the partner and 25% to Buffett. Withdrawals were restricted to a single annual date, and Buffett provided only a yearly summary of investment performance, without revealing specific strategies.
By structuring investments through an FLP, families can create tailored agreements that align with their financial goals while maximizing control, tax efficiency, and legal protections.
Is a Family Limited Partnership the Right Choice for You?
For families seeking a strategic way to preserve and transfer generational wealth, a Family Limited Partnership can be a valuable tool. It offers flexibility, asset protection, and potential tax benefits, making it an attractive option for wealth management.
However, FLPs also come with certain risks. While partnership assets are generally shielded from external creditors, the actions of one partner could create liabilities that impact others. Additionally, because liability protection varies among general and limited partners, risks may not be evenly distributed.
FLPs work well for holding investment and real estate assets, but they may not be the ideal structure for all asset types. Families focused solely on estate planning might explore alternatives such as trusts. On the other hand, those looking to consolidate family wealth and streamline asset transfers should consider consulting an estate planning attorney to determine whether an FLP aligns with their financial goals. Reach out today and we’ll guide you toward the right choice for your family!
Bromlow Law, PLLC and Laura L. Bromlow, are dedicated to the practice of Elder Law and Estate Planning. Our practice focuses solely on working with clients in these and closely related legal fields. Laura L. Bromlow is a Certified Elder Law Attorney with the National Elder Law Foundation. Bromlow Law, PLLC strives to enhance communication among family members and loved ones and to keep them all out of conflict so they can stay out of court. We want to help you keep your close circle safe!
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