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________________________________________________ Family Limited Partnerships In recent years, family limited partnerships (FLPs) have become
synonymous with gifts and deep discounts. Yet FLPs have played an
important role in family estate and management planning for more
than 40 years because of the many nontax advantages they offer over
making outright gifts. Simplicity
of Gifting It is often easier to make gifts of property through an FLP, especially
when the gifted asset is real estate or tangible personal property
(such as art). You contribute assets to the FLP and gift limited
partnership interests to your children. This is simpler than giving
your children undivided fractional interests. Why? Undivided interests
complicate the ownership and sale of real estate, both mechanically
and from the standpoint of possible title issues, and of artwork,
because all of the owners are entitled to possession rights of some
sort. Control
of Property When you transfer your interest in real estate, art, cash or securities
to an FLP and gift limited partnership interests, you retain control
over the actual property. Your children are entitled to receive
only their own shares of the distributed cash flow as determined
by you, the general partner. You can control this cash flow by reinvesting
all or part of the FLP earnings. This power is a byproduct of being
the general partner, not an estate tax retained power over the limited
partnership interests, which would cause estate inclusion. On the
other hand, if you make outright gifts of property that is readily
divisible, such as cash or securities, you immediately have transferred
control of that property to your children. Modernization
of Investments An FLP can function like a private investment company and improve
cash management. This can be particularly helpful when family wealth
has already been distributed among two or more generations. The
investment assets of the family members and family trusts are contributed
to an FLP, which can have a managing general partner or management
committee. This consolidation can permit a reduction in the number of advisors
and administrative assistants, eliminate the need to maintain multiple
accounts, and allow access to investments that have minimum participation
levels. In addition, modern portfolio theories can be more effectively
applied and daily cash flow investment techniques can be used. This can make an FLP a better option than a trust, where some flexibility
is lost because the trustees are required to invest based on the
prudent person rule (or variations). This standard is more limiting
than the business judgment rule that applies to managing partners,
under which a bad investment outcome may be easier to defend to
other family members. Protection
of Assets The FLP also serves as asset protection against future creditors.
If a family member holding an FLP interest is subject to creditor
claims that cannot be met, the creditor cannot attack the actual
FLP assets, assuming there has not been a fraudulent conveyance.
The creditor generally can only obtain a charging order against
the family member's partnership interest, which would entitle the
creditor to FLP distributions only when the family member would
have received them. Parents are often concerned about making gifts of cash or securities
to children whose marriages might be shaky. Even though gifted property
may be separate property and not subject to a divorce proceeding,
cash and securities often become commingled. However, a gift of
an FLP interest creates wealth for your child that, by its nature,
is segregated. Can
an FLP Work for Your Family? An FLP offers you the flexibility to exclude or include family
members in administration and investment philosophy at appropriate
stages in their lives. It permits you to shelter, protect, and teach,
and can enhance investment return.
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Copyright 2001 Fahlman & Olson. All rights reserved.
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