Family Limited Partnerships (FLPs) have become a popular vehicle to preserve family businesses as part of an estate plan. They provide a way to maintain control of the business and pass it on to family members. However, there are some drawbacks that you should be aware of before creating an FLP.
A Family Limited Partnership (FLP) creates a separate entity into which you can place an almost unlimited amount of assets. This may help protect these assets from personal creditors and may allow you to maintain control of the assets during your life. Then you can give your family members limited partnership interests in the entity.
A recent article in Life Health Pro, titled “6 Pitfalls That Clients Eyeing an FLP Need to Consider,” points out the potential drawbacks of an FLP:
- Expense – Creating an FLP can be very expensive; anything placed into the FLP will need to be appraised.
- Limitation on Asset Types – Some assets are not well-suited for an FLP, including residential property and some types of securities.
- Puts Conflicts Off – Just putting a family business into an FLP does not necessarily end any conflicts the next generation may have over that business. You will still need a business succession plan.
- Control of Assets – While you can control FLP assets, there are limits. You cannot use these assets to pay for personal expenses.
- Expensive for Children – Having part ownership of the FLP may subject your children to capital gains taxes they cannot afford.
- Minor Children – You cannot give minors an interest in the FLP directly. You have to give them a share through a parent or guardian.
Family Limited Partnerships can be an excellent tool to pass on your business, but only as part of a greater estate plan. Please talk to an estate planning attorney about whether an FLP is right for you and your family.
Reference: Life Health Pro (July 9, 2014) “6 Pitfalls That Clients Eyeing an FLP Need to Consider”
Image Credit: Biggenden business J. C. Bengtsen family butcher, ca. 1920 [Public domain], via Wikimedia Commons