Family Limited Partnership and Non-Tax Business Reasons for Formation?

Guy Hatcher: Non-tax Reasons for forming a Family Limited Partnership (FLP)

Guy Hatcher
Guy Hatcher
  • Guy Hatcher
    Guy Hatcher
    Guy Hatcher
    Guy Hatcher

Did you know that if you do not have some non-tax reasons for forming a Family Limited Partnership (FLP), one of the maintax benefits, which is the Estate and Gift Tax Valuation Benefit, may not be allowed? 

Consequently, there must be some non-tax business reasons for forming an FLP, some of which are listed below: 

  1. An FLP allows parents to have some indirect control over cash flow that goes to their children. When a parent “gifts” a limited partnership interest to a child, the child does not receive something that may be “spent,” as would be the case when a cash gift is given. Therefore, the parents maintain some leverage over their children’s spending.

  2. By holding family assets in an FLP, such as non-homestead real property, a family is able to transfer that “undivided” interest while also maintaining consolidation of the property as a unit. This eliminates the fear of the asset itself being subject to “fragmentation” or “partition” in the future. This also allows the assets to be managed in a more comprehensive and prudent manner.

  3. The FLP allows simplified annual gift giving by allowing “percentages” of partnership interests in the FLP to be transferred, thus, maintaining the family assets as a whole.

  4. The FLP helps keep the assets in the family because it provides Buy-Sell restrictions on transfers through the partnership. Typically, these Buy-Sell restrictions provide that if a child wishes to relinquish his/her FLP interest, the remaining family members may buy that interest themselves at a discounted fair market value. This applies to both voluntary and involuntary transfers. 

    In addition, if a child (who is a limited partner) is going through a divorce, the FLP could function as protection in keeping any interest from being awarded to the non-partner spouse. Even if the non-family member spouse obtained interest previous to the divorce, they may be compelled to “sell” their interest back to other family members at a discount, if adequate restrictions on transferability are put in place.

  5. Limited partnerships are considered to be one of the best asset protection entities in which to do business. The FLP can provide limited liability to the limited partners from the FLP’s creditors and some protection from the limited partner’s judgment creditors.

  6. The “Business-Judgment Rule” applies to the FLP partners, as opposed to a higher fiduciary standard to the Trustees of a Trust, when investment decisions are made on behalf of family members and their assets.

  7. The FLP can be used to reduce or eliminate probate and guardianship proceedings in foreign jurisdictions, and if used with a revocable trust, can eliminate those same proceedings in Texas.

If you would like more information about how FLPs can benefit you, your family and your business, please feel free to give us a call. We can go over this and more during your complimentary consultation. 

Links of Interest:

Small Business Strategies 

Life Multiplier Tools 

Plan First

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