What Is A Family Limited Partnership
There are many techniques that can be used to transfer the ownership title of a family business. One of them is through a family limited partnership. The partnership is legally the same as traditional partnerships, but only family members can be general or limited partners in the family business. General partners can be exposed to lawsuits and they are liable. If a limited partner gets involved in the management of the business, he instantly becomes a general partner and also liable. In case of lawsuits against the company, only general partners can be exposed to creditor seizures, but if all members have limited liability, they can't lose anything. This can happen only if the general partner is an irrevocable trust.
A family limited partnership can work with good planning. Usually, parents start the business and they become owners and general partners with 2% of the business. In time, children (the limited partners) can have a 98% stake in the business. This can be a way for parents to transfer their assets to their children with no taxes. If you plan it right, a family limited partnership can be a very helpful tool in transferring assets to your children, but there are many ways to transfer your wealth more efficiently. Usually, if family limited partnership is made to late, the IRS attacks the partnership and considers it abusive. This type of partnership must be made in advance, not at the parent's deathbed. The IRS never agrees with this use of a family limited partnership. Underlying assets from family limited partnerships can have discount estate tax valuations. If the business or the assets are sold, the estate tax valuation is reduced with 15% or 35% due to a limited market. Another reduced tax valuation of from 15% to 35% can be given to the minority position in the underlying assets. It is called the limited minority interest discounting. This two discount estate tax valuation can get to a combined 70%.
General partners (parents) can't offer as gifts properties from the business because the children can gain tax liability. If the planning is made correctly, it can be done without any taxes, but if the children gain unexpected capital, it will be taxed. With a family limited partnership, only general partners are exposed to lawsuits, creditor seizures or other claimants. General partners have full control over assets owned by the business and they are responsible in a potential lawsuit. A family limited partnership can't offer protection to general partners, but you can use a trust as a general partner.
When starting a family limited partnership, you should know who will be the owner and general partner of the business and what methods will you use for asset protection and lowering the taxes. With a good plan you can eliminate estate taxes, reduce income taxes and even eliminate them. In a family limited partnership you should also plan ahead. After some time, some of the limited partners should become general partners and you should know who has the ability of managing the business in a long term. Some members should be managers, some voters and some silent partners.
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