Some Facts About The FLLP

The family limited partnership has been widely propagated as the device of choice for transferring the family business and other highly appreciated assets tax-free from parents to their children. And a family limited partnership is pretty much a red flag for the Internal Revenue Service as abusive tax-free wealth transfers.

The fact is that a family limited partnership is nothing more than a traditional partnership for which only family members can be partners either as general partners or limited partners.

In the case of a family limited partnership the general partners are exposed to frivolous lawsuits, court judgments and creditor seizures, but this problem can be avoided if an irrevocable trust is used as the general partner of your family limited partnership.

A family limited partnership works like this: the parents become owners with a two percent stake in the business and thereby establish themselves as general partners in the family limited partnership. Then over a period of time by gifting limited partnership interest the children end up as limited partners with a 98 percent stake in the business.

The result of gifting to your children with a family limited partnership is highly appreciated assets that are transferred from the estate of the parents to the children presumably tax-free. If you carefully and properly implement the family limited partnership it will prove to be a useful tool. However there are better ways to achieve a significantly more efficient transfer of wealth.

The IRS considers such family limited partnership arrangements as abusive when overzealous practitioners over claim two commonly used discounts in the valuation of underlying and highly appreciated assets in estate tax valuations.

The IRS comes down rather hard, when such arrangements are made over a deathbed especially in the hours or days before death. There is also an increasing congressional opposition to the use of family limited partnerships.

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