The Family Limited Partnership vs. The Family LLC: Choosing the Best Structure for Your Estate Planning

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Ken Hargreaves, CFP®, AIF®, AWMA®, CRPC®
A comprehensive estate plan goes beyond trusts, wills, and charitable giving strategies. In fact, you can start planning your transfer of wealth today by putting your assets together under one company that you maintain complete control over while also giving your loved ones tax-efficient profits and tax-free gifts from your family business. This article compares and contrasts two business structures that can be established and utilized for those purposes; the Family Limited Partnership and the Family Limited Liability Company.

The Family Limited Partnership (FLP)

The FLP is a company comprising one or more general partners, such as a wife and husband. The general partners have managerial roles and make all the critical business decisions. Any other family members can purchase shares of the FLP, making them Limited Partners. Limited Partners do not have any authority or responsibilities, though they can take on a limited amount of responsibility and draw a salary if the General Partners allow it.
Usually, a family establishes an FLP to keep business interests and real estate assets securely within the family. For example, let’s imagine that you and your spouse have several duplexes and apartment complexes, and you’d like to distribute the profits to family members on a tax-advantaged basis. With the help of a financial professional, you can write up an agreement to determine the roles and responsibilities of the General Partners, declare how many shares there will be, and divvy up the shares between the General Partners and Limited Partners. Restrictions on the Limited Parners’ ability to sell or transfer assets to non-participants can also be imposed, helping guarantee that the business assets stay within the family.
Once the FLP is established, you, as the general partner, move your real estate assets to the FLP and then start receiving payments through dividends and a realistic salary. The FLP is not taxed itself, so all profits are distributed to the Partners and they pay income taxes according to their tax bracket.

Estate Planning

Additionally, you can gift shares tax-free to designated beneficiaries each year up to the Annual Gift Tax Exclusion. In 2023, that means $17,000 worth of assets can be given to each beneficiary from each General Partner, allowing a married couple to gift $34,000 worth of assets in 2023. With this method, you can slowly bequeath your assets to your desired beneficiaries without burdening them with a gift tax while simultaneously reducing your taxable estate.

The Downsides

FLPs can be costly to set up and challenging to maintain due to their many moving parts and complex legal structures. Meetings must be held, minutes must be noted, and there must be a genuine business arrangement. General Partners also face unlimited liability and will be responsible for any debts the FLP incurs, exposing them to creditors and bankruptcies.
However, FLPs so greatly assist in transferring wealth to younger generations that they are a hugely popular tool in estate planning, even after considering their issues.

Family Limited Liability Company

Most people have probably heard of a Limited Liability Company; a family LLC isn’t much different. A family LLC is a company operated by one member of the family with other family members as the shareholders.
The only difference between an LLC and a family LLC is that all shareholders must be family members through blood, marriage, or adoption. Overall, family LLCs are pretty similar to Family Limited Partnerships in their advantages:
Beyond that, some differences should be noted. For example, the partners of a family LLC can hire a manager to conduct the business’s day-to-day operations. This is opposed to the General Partner or Partners of an FLP who are responsible for the company’s daily operations.
Also, all partners of a family LLC have limited liability, meaning that creditors cannot attack the assets in the company if one partner loses a lawsuit, for example. This is probably the most crucial difference that may persuade a family to open a family LLC over an FLP.
In the operating agreement of a family LLC, it is possible to include provisions that restrict the transfer of assets, limit the ability to force out management, or prevent certain members from making business decisions. These provisions can help maintain control within the family and protect the company’s assets.

Pros and Cons of Each

Family Limited Partnership (FLP):

Tax-efficient: Pass-through taxation avoids double taxation associated with corporations.
Costly setup: Establishing and maintaining an FLP can be expensive due to legal and administrative costs.
Asset protection: Limited partners' personal assets are protected from FLP's liabilities.
Complex structure: Requires regular meetings, documentation, and adherence to a genuine business arrangement.
Estate planning: Facilitates the transfer of wealth to younger generations through tax-free gifting of shares within the annual gift tax exclusion limits.
Unlimited liability: General partners face unlimited liability, leaving them exposed to creditors and bankruptcy risks.
Flexibility: Can be customized to suit specific family dynamics and financial goals.

Family Limited Liability Company (Family LLC):

Tax-efficient: Pass-through taxation avoids double taxation associated with corporations.
Restrictive ownership: All shareholders must be related by blood, marriage, or adoption.
Asset protection: All partners have limited liability, shielding personal assets from the LLC's liabilities.
State regulations: Family LLCs are subject to state-specific restrictions, which can vary and affect the ease of setup and management.
Estate planning: Allows for the transfer of shares to beneficiaries at a discounted basis, reducing the taxable estate.
Less control for general partners: Compared to an FLP, general partners in a family LLC may have less direct control over day-to-day operations if a manager is hired.
Flexibility: Highly customizable operating agreements and can hold various types of assets.

A comprehensive strategy

As stated above, the family limited partnership has a hole in its strategy, that of the general partners being exposed to unlimited liability. One method to fill that gap is for two family members to form a family LLC and make that company the General Partner of the Family Limited Partnership. Then, if one spouse loses a lawsuit and is in debt, the creditor cannot seize assets from the FLP because the family LLC protects them.

In conclusion

Both Family Limited Partnerships (FLPs) and Family Limited Liability Companies (Family LLCs) offer valuable estate planning strategies for families seeking to protect and transfer their wealth efficiently. Each structure has its own unique benefits and potential drawbacks, so it’s essential to carefully consider your family’s specific needs and financial goals when deciding which option is the best fit. If you’d like to go over your financial situation to help determine which would be better for you, click the button below to schedule some time to talk.

Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. All investment strategies have the potential for profit or loss. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author/presenter as of the date of publication and are subject to change and do not constitute personalized investment advice.

A professional advisor should be consulted before implementing any investment strategy. WealthGen Advisors does not represent, warranty, or imply that the services or methods of analysis employed by the Firm can or will predict future results, successfully identify market tops or bottoms, or insulate clients from losses due to market corrections or declines. Investments are subject to market risks and potential loss of principal invested, and all investment strategies likewise have the potential for profit or loss. Past performance is no guarantee of future results.

Please note: While we strive to provide accurate and helpful information, we are not Certified Public Accountants (CPAs). The information in this article is intended for informational and educational purposes only and should not be interpreted as tax advice. It is crucial to consult with a CPA or tax professional to discuss you

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