Family limited partnerships, or FLPs, offer an array of estate planning benefits and can be used to protect the financial interests of a family business. If your family owns a business or “nest-egg” type assets and wants to safeguard its wealth for future generations, you need to explore how an FLP can be a critical component of your plan. The Houston estate planning attorneys of Capstone Legal Strategies are here to advise you and your family.
What Is a Family Limited Partnership (FLP)?
An FLP is actually two separately formed entities: (1) a general partner entity and (2) a state-formed limited partnership. Together, both of these entities are referred to as an FLP. It’s called an FLP because of the people involved, which are namely family members, close friends, or other individuals that may be supported by the assets that the FLP owns. The general partner is often an LLC or a Corporation and the limited partners can be individuals, trusts, or other businesses. Applicable state law, bylaws, a partnership agreement, and a shareholder agreement will control the operation of the FLP. Note that not all FLPs are created equally. Certain practitioners use FLPs strictly for estate planning; however, Capstone Legal Strategies uses a form of FLP that provides not only estate planning, but also asset protection. There are two types of partners in an FLP.
General Partner
A general partner is usually in the form of an LLC or a Corporation. Shares are divided among family members or close friends and the senior family members, such as a husband and wife, will serve as directors subject to the bylaws and a shareholder’s agreement.
The general partner manages the day-to-day activities of the FLP as well as the FLP’s assets. While their management rights are an advantage, general partners also face unlimited liability for their actions. This means it can be held personally responsible for the debts of and judgments against the FLP. This is why we recommend that an entity be the general partner, rather than the individuals themselves.
Limited Partners
By contrast, limited partners are owners of the FLP and play no active management role in the business. They receive profits, usually in the form of distributions, at the discretion of the general partner. The limited partners often include the senior members of the family (husband and wife), children, and other individuals that the senior members support, either individually or through trusts.
Because limited partners do not control the day-to-day aspects of the FLP, their liability for the actions of the FLP is limited to the amount of their investment in the FLP.
Reasons to Form an FLP
It should be noted that there must be an actual business associated with the FLP and that partnership assets should not be used for personal expenses. The business of an FLP can either be owning stocks, owning other LLC interests, owning real estate, and other assets that the family intends to keep and protect as “nest-egg” type assets. A properly structured and maintained FLP offers the following advantages, among others:
Reduced Taxes
An FLP can be used to limit tax liabilities and thereby preserve family wealth for the next generation. By taking advantage of federal gift tax exclusions and valuation discounts, the heirs to the senior family members can reduce their tax burden on the transfer of the FLP limited partnership interests to the heirs.
FLPs themselves do not pay federal income tax. Instead, a pass-through taxation system is used (similar to other types of partnerships) by which partners report their FLP income on their personal returns and pay accordingly.
Asset Protection
Assets that are transferred to the FLP become the property of the partnership. They are no longer the partners’ personal assets. As such, using an FLP can offer another layer of protection against claims made by creditors against the limited partners. The FLP must be structured properly to accomplish this, so make sure to work closely with an experienced estate planning attorney.
Maintaining Control
General partners can use the FLP to retain control over the partnership’s assets as well as the interests of limited partners through a shareholder agreement and proxy voting arrangements. Due to its right to manage the FLP, the general partner can establish rules concerning the transfer of business interests, the way that profits are distributed (both in timing and amount), and the use of assets. For example, they can restrict the ability of a limited partner to sell his or her interests and can even dictate what happens to those interests if a limited partner gets divorced, becomes deceased, decides to withdraw from the FLP or other similar instances.
Succession Planning
An FLP can be part of a comprehensive succession planning strategy. It allows for the gradual transfer of assets to younger generations while maintaining the ability of senior family members to retain control of management. This, in turn, teaches younger family members how to properly manage family wealth.
Drafting the Governing Documents
A well-drafted, comprehensive partnership agreement, a properly executed set of bylaws, and a shareholder agreement are critical to ensuring everyone understands the rights and duties created by the FLP. These agreements facilitate the formation and management of the FLP. In order to establish the FLP, formation documents will need to be drafted, signed, and filed with the respective state, along with the payment of a filing fee.
After the agreements have been formalized, the parties can begin transferring assets to the partnership. These transfers are accomplished by way of deeds, assignments, new bank or brokerage accounts, and other methods.
The partnership will need to be established for a specific duration, which is usually 50 years. Limited partners are not allowed to withdraw before the end of the partnership term unless an exemption in the governing documents applies.
How Our Estate Planning Attorneys Can Help
We can assist with the formation of your FLP by:
- Reviewing your business and various assets to determine how best to structure the partnership
- Explaining the benefits of FLPs as well as the relevant laws and rules that govern them
- Helping general partners and limited partners understand their rights and obligations under the FLP
- Drafting and executing a partnership agreement, bylaws, and a shareholder agreement and explaining how it works to the partners
- Answering questions and concerns as you begin operating under the FLP
Contact Our Houston Family Limited Partnership Attorney
Capstone Legal Strategies is ready to help you get started with your family limited partnership. We are trusted estate planners and business lawyers who understand how these practice areas intersect to help families protect what matters most to them. To learn more or to schedule your initial consultation, give our office a call today.