FAMILY LIMITED PARTNERSHIPS
Family limited partnerships are being used by many people in their estate planning as a method by which a senior generation can give away income producing property which has a likelihood of appreciation and yet control distribution and cash flow from the assets. When the family limited partnership technique is properly implemented and structured, significant federal estate tax, Pennsylvania inheritance tax, gift tax and in some cases income tax savings can be recognized.
Ordinarily, when a senior generation owns family real estate, a business, or other appreciating assets, and they keep them in their own names, the full value of the assets are taxed by both Pennsylvania and the IRS. However, these taxes can be significantly reduced when they transfer these assets into a family limited partnership. The senior generation (usually the husband and wife) can be the general partners directly or they can be the owners of a S Corporation which can act as the general partner and give further insulation from liability.
The senior generation then gifts away (after some period of time) the limited partnership interests. These interests are usually gifted to members of the next generation. Because the limited partners are not in control, own a minority interest, and for other reasons, a substantial discount in the value may be taken at the time the gifts are made. It is not uncommon to see gifts to children and grandchildren reduced by 25% – 35% of their apparant value.
There are a number of specific benefits of properly structured family limited partnerships. First, the gifts can be made of the underlying interest so that further appreciation is outside the senior generation’s estate while the senior generation gets to keep some element of control about how income is distributed. Another benefit is that general partners can keep a substantial amount of income in the form of management and other proper fees. However, a balance needs to be reached so that this is not viewed as abusive by the Internal Revenue Service.
There is also a major benefit which is that the limited partnership interests offer some creditor protection. These protections are against future creditors of the donor generation and limited partnership interests are somewhat protected against both existing and future creditors of the children and grandchildren who may be receiving the limited partnership interest. Typically parents are concerned about the divorce and the family limited partnership does have the capacity to achieve this goal.
Likewise, there can be a significant protection against a spendthrift child or grandchild who receives the limited partnership interest, as the recipient of the gift is usually required to sell the limited partnership at fair market value and this duty or right can be lodged with a trustee who owns the limited partnership interest and not the child directly.
Another advantage of using family limited partnerships is they can avoid ancillary probate if assets are located in states other then the state in which you are a resident.
Thus, there are significant benefits of having a family limited partnership. However to obtain the benefits particular care must be exercised in drafting the documents which create the partnership, which set forth the management rights and obligations of the various parties, and in creating any trusts which hold the limited partnership interest of children or grandchildren.
In short, if you are considering transfer of substantial assets to children or grandchildren and would like to obtain significant fedral estate tax savings, in some cases, income tax savings and to maintain a certain income flow and some very beneficial aspects of control, the family limited partnership can be the solution for you.
For more information about family limited partnerships contact David M. Frees, III, Esquire, Unruh, Turner, Burke & Frees, P. C., (610) 933-8069.