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 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.
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.
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.
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.
Family Limited Partnership (FLP):
Family Limited Liability Company (Family LLC):
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.
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.