Pros and Cons Creating a Family Limited Partnership

A family limited partnership is a legal arrangement in which multiple partners, who are also family members, control a business. Family limited partnerships function similarly to typical limited partnerships, and there are two types of partners involved — general partners and limited partners. In most cases, the parents are the general partners, and the children are limited partners.

Family members own many businesses in the United States, but few family-owned businesses have effective estate plans. Taking the time to create a family limited partnership is a meaningful way to protect your family-businesses assets. Through a well-prepared succession plan, family-limited partnerships, and family limited liability companies, allow business owners to transfer control to their loved ones smoothly. Family limited partnerships also enable individuals who have significant wealth to pass it on to their loved ones quickly and with reduced tax liability.

Many of people seeking to make the most of their succession plan consider a family limited partnership because of the tax benefits involved. When you create a family limited partnership, you will be able to make gift transfers to your children and beneficiaries and use the annual gift-tax exclusion. Additionally, when you place an asset into the family limited partnership, any future returns generated by that asset will stay in the family limited partnership. Doing so is extremely helpful in limiting tax liability. When the parent passes away, their estate will only include the asset’s value when the parent transferred it into the family limited partnership. The increased value will not be added to a parent’s estate, ultimately decreasing the estate liability.

Creating a family limited partnership also allows parents to maintain control over their business as a general partner. Parents have flexibility when it comes to drafting their family limited partnership agreement. Such limitations can include restrictions on transferring the business’s interest.

For example, they can create a restriction on transferring interests should one of the children get divorced. In that case, the family limited partnership agreement could stipulate what will happen to the divorced spouse’s interest. Keep in mind that general partners do have the ability to change the agreement’s conditions should any family member’s personal situation changes. In that way, and others, family limited partnerships are not the same as irrevocable trusts. Unlike irrevocable trusts, the members of a family limited partnership can change the terms of the agreement.

Creating a family limited partnership also limits liability. Family members who have limited partnership interests are protected from their creditors. Creditors generally cannot gain control of interests owned by the limited family partnership unless the general partners provide their consent. Creditors also generally cannot force family limited partnerships to make cash distributions, either. With some exceptions, limited partners enjoy a degree of asset protection that they would not enjoy in another business structure.

There are some notable disadvantages to creating a family limited partnership. First, the general partners are more exposed to liability than the limited partners. Additionally, family limited partnerships are complex legal and business structures. Those considering a family limited partnership arrangement should hire professionals, including tax experts, to set up the legal structure. Depending on your business and income, it may also be advisable to keep certain professionals on staff on an ongoing basis should any issues arise. It is wise to hire an estate planning lawyer, an accountant, and a property valuation expert to assess all of the properties’ value transferred into the family limited partnership.

It is important to note that general and limited partners will not transfer all of their personal assets into the business for tax benefits. The family limited partnership is a business and transferring personal assets into the business could negatively affect your ability to use the annual gift tax exclusion as a way to transfer limited partnership interest to your children and grandchildren. It is worth considering creating a family limited partnership if you have enough non-personal assets such as securities and investment properties that can be transferred to the family limited partnership.

If you own a family business, or you are considering starting a family-owned business, creating a family limited partnership could be beneficial. The estate planning lawyers at Arnold & Smith, PLLC, can review your situations and discuss your future goals. We will advise you as to the best way to protect your business and your loved ones. Contact us today to schedule your initial consultation at our Charlotte, Mooresville, or Monroe offices.