Family limited partnerships are ideal for families who own business assets in common. This includes assets they one day wish to pass down to other family members.
Family limited partnerships can protect partners from lawsuits, creditors and divorce.
Say a father sets up a family limited partnership. He is both a general partner owning 1% and a limited partner owning 90% of the partnership. Each of his two children own 4.5% of the company. The following protections can apply:
- If the father is sued, creditors usually cannot seize his partnership assets provided the partnership was set up before the creditor problems began; or
- If one of the children divorces or is subject to creditor claims, the ex-spouse or creditor(s) generally cannot claim partnership assets.
Family limited partnerships can help lower taxes on family estates.
Say a husband and wife, Mr. and Mrs. Smith, collectively have $200,000 worth of taxable income from various investments. They are in the maximum 32% tax bracket and owe approximately $64,000 in taxes per year on this income.
This year, the Smiths decide they want to save money on taxes and set aside funds for their grandchildren's future education. So, they set up an FLP and transfer all of their assets into the partnership. As general partners, they name a total of seven children and grandchildren as limited partners, granting them a combined ownership interest of $100,000.
Under their partnership agreement, the children and grandchildren now owe taxes on $100,000 of the $200,000 generated by the partnership. Depending on the age of the children and grandchildren, the $100,000 of income could be taxed at the children's or grandchildren's income tax rate, lowering the total income tax liability.
The best part is that the partnership agreement does not require the $100,000 to actually be distributed to the children. As general partners, the parents retain the entire amount and pay the taxes on their children's share of partnership income. And with the 17% reduction in annual taxes, the Smiths can set up a college savings fund for their grandchildren.