Estate planning and passing down generational wealth is a hot topic among families and family-run businesses. Most families with a non-business motive opt for family limited partnerships to protect family assets and ensure their vast wealth is protected from creditors, lawsuits, and other future risks.
But do all families need one?
Here’s all you need to know about family limited partnerships and how they can be resourceful in asset protection.
What Is a Family Limited Partnership?
A family limited partnership (FLP) is an organizational structure where family members pool money to run a business. Each family member buys shares or units of the business, taking profits in the proportion of their shares as outlined in the partnership’s operating agreement.
Two or more family members can own a family limited partnership. They’re often established to preserve generational wealth and facilitate tax-free real estate, assets, and other wealth transfers.
How Does a Family Limited Partnership Work?
There are two types of partners in a family limited partnership. They include general partners and limited partners.
General partners in an FLP typically own the largest share. They’re responsible for the day-to-day operations of the business, such as overseeing all investment transactions and cash deposits. If outlined in the partnership agreement, the general partners take a management fee from the profits.
Limited partners don’t have management responsibilities. Instead, they buy shares in the business in exchange for interest, dividends, and profits that the FLP might generate.
Most general partners are senior family members, while younger members such as grandchildren and children make up limited partners.
Advantages of a Family Limited Partnership
There are several advantages of setting up a family limited partnership. They include the following:
Asset Protection
Since an FLP is treated as a separate legal entity, all assets under its ownership are deemed its property. Therefore, creditors pursuing an individual’s credit cannot access these assets, even though the partner previously owned them before transferring them to the FLP.
Control and Flexibility
Since it is a form of a limited partnership, an FLP is managed according to the partnership agreement. Therefore, general partners retain control over the FLP’s assets, with the option to amend the agreement and introduce flexibility over management and control.
Wealth Distribution
An FLP allows individuals to distribute family wealth to their heirs using limited partnership shares.
Estate Tax Reduction
When general partners transfer their estate ownership to an FLP, they reduce their estate size, effectively reducing their estate tax burden.
Learn How Other Business Entities Can Protect Your Assets
Family limited partnerships are one of many business entities you can set up to protect your assets and pass wealth down to future generations. Learn more about asset protection and how you can use various means to keep your most prized possessions out of the creditor’s reach.
If you want to go one step above an FLP, contact The Second Estate about Implementing an LLLP which is another layer of the onion and preferred 10 to 1 over just an FLP for just a slightly higher cost.