Family Limited Partnerships and Why They Can Be a Great Estate Planning Tool.
A Family Limited Partnership is an estate planning tool used to help manage large estates, protect assets from creditors, pass wealth to subsequent generations, and avoid estate taxes, among other benefits. Simply put, a Family Limited Partnership is a limited partnership in which all partners are family members. For many wealthy families, it is the “go to” tool to make sure wealth will be maintained in their family for future generations.
A Family Limited Partnership generally takes the form of a limited partnership. Under a common scenario, the parents contribute assets and income (land, stock, etc.) to a limited partnership. The assets contributed are assets the parents owns but they do not use for the purpose of living. In exchange, the parents receive general partnership interest and limited partnership interest. Over time, the parents (the general partners) give their children and grandchildren limited partnership interest.
Before explaining why the above scenario is beneficial, let me give you a general description of the framework of a limited partnership. A limited partnership is made up of two types of partners, general partners and limited partners. The general partner has control over the partnership and manages the partnership. The limited partners are passive owners, and have very little control over the partnership. Unless the partnership agreement provides otherwise, the profits of the partnership flow through to the partners in proportion to their ownership interest in the partnership.
Now that you have an example of a common scenario and sense of how a limited partnership is structured, let me give you a handful of the top reasons why a Family Limited Partnership can be great estate planning tool. First, the parents of a family can move wealth out of their estate that would otherwise be subject to estate tax. Second, they can do this without giving up complete control over the assets. Third, since the assets are owned by the family limited partnership, and not the children individually, the parents can be assured that the family ranch or family farm will not split into smaller tracts. Fourth, the assets of the trust are protected from creditors because the Family Limited Partnership is a limited liability entity.