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A Family Limited Partnership Can Be a Smart Estate Planning Tool

Aug. 29, 2016

The family limited partnership, a popular estate-planning tool, may have a limited lifespan, at least in its current form. Specifically, the U.S. Treasury Department has proposed regulations that may limit some types of transfers available under the option.

As background, the FLP is, at its name suggests, actually a partnership, comprised of general and limited partners. Assets can be transferred into the FLP. However, the type of partnership interest determines the rights that the FLP will confer.

General partners have rights to income earned by the FLP, voting rights, and the authority to manage and control the FLP’s assets. General partners can even sell assets or interests of the FLP to others. Similarly, any debts or other liabilities of the partnership are typically only the responsibility of the general partners.

The limited partners, in contrast, have almost no control in the management or operation of the FLP. For that reason, they usually have no guaranteed right to its income, and they are also insulated from most of its liabilities, such as debts. However, a limited partner can share in an FLP’s profits via a type of distribution called a distributive share.

Since a typical investor would not want to buy into a partnership where he or she has no management or control, the Internal Revenue Service has offered a valuation discount on assets transferred into the FLP. Of course, assets in a FLP must still be transferred to loved ones. Fortunately, those assets transfers can be done via trusts, while still taking advantage of the valuation discount.

Source: Accounting Today, “Family Limited Partnership Loophole Is Closing,” Roger Russell, Aug. 16, 2016