Estate Plan Concerns
Bill and Ann want to make sizeable gifts to their children, and they would like to gift as much as possible without incurring federal gift tax. Bill and Ann are already using their annual gift tax exclusion to shelter other gifts from gift tax. However, neither Bill nor Ann has used $1,000,000 lifetime gift tax exemption. Consequently, they would like to use their exemptions ($2,000,000 combined) to shelter the gifts from gift tax.
Estate Plan Solution
Bill and Ann have learned that the use of a Family Limited Partnership (“FLP”) can increase the benefit of their gift tax exemptions, as well as provide other important benefits for them and their family. Consequently, they have decided to use the FLP in their gifting strategy. They have also decided that the gifts are to be made to a new irrevocable trust that Bill and Ann will create for the benefit of their children. They are also considering including their grandchildren as beneficiaries of the new trust.
Combination (FLP/GRAT) – Family Limited Partnership with a Grantor Retained Annuity Trust Process
- Bill and Ann create a Family Limited Partnership (FLP).
- Bill and Ann, then, transfer selected assets (e.g., real estate, business interests or securities) worth $3,401,360 to the partnership in return for general partner units and limited partner units.
- Bill and Ann then gift the 98% limited partner units to an irrevocable trust for the benefit of their children. For gift tax purposes, the value of the limited partner units may qualify for special valuation discounts resulting in significant estate and gift tax savings (a 40% valuation discount is used, here). Bill and Ann, as the only general partners retain control of the partnership.
- The value of the limited partner units held in trust is not includible in Bill’s and Ann’s taxable estates, and therefore escape estate taxes at their deaths.
- Family Business Management Structure: The FLP provides an effective structure for management of a family’s business interests and investments.
- Easier Asset Transfer: Transferring interests in an FLP to family members is easier and more efficient than transferring fractional or undivided interests in specific properties.
- Limited Internal Control: Control and management of the FLP can be effectively limited to one or more partners.
- Potential Income Tax Savings: Income tax savings may be realized by shifting taxable income to family members in lower income tax brackets.
- Estate and Gift Tax Savings: The FLP offers the opportunity for significant estate and gift tax savings.
- Partner Shares Not Taxable at Death: Can be used with other estate planning techniques to enhance the individual’s overall estate plan and reduce taxes.
The Family Limited Partnership (“FLP”) is a special type of partnership commonly used to hold and manage selected business and investment assets for members of a family. Generally, the FLP involves two types of ownership interests, general partner units and limited partner units. General partners are vested with the management and control of the partnership, while the limited partners are essentially passive investors who do not participate in management and control.
► General Partners Have Liability; Limited Partners Do Not
Generally, speaking, general partners are personally liable to the creditors of the partnership, while the limited partners are not personally liable, their liability being limited to their investment in the partnership. Certain states, including Florida, offer an entity known as the limited Liability Limited Partnership (or, “LLP”) that can be used to also limit the personal liability of the general partners. Examples of assets that would be suitable for a FLP includes closely-held business interests (although “S” corporation stock would not be appropriate), real estate and marketable securities. Note that, although the above diagram shows individuals as general partners, a corporation is frequently interposed as the general partner, with individuals owning the corporate stock and serving as managers of the corporation.
► Significant Tax Savings Along With IRS Scrutiny
In addition to providing an effective ownership structure for the management and transfer of assets, the FLP offers opportunities for estate tax and income tax savings within a family, as well as asset protection. While the estate and gift tax aspects of FLP’s have come under intense scrutiny by the IRS in recent years, a properly designed and managed FLP still can offer significant estate and gift tax savings for families.
Tax Reduction Formulas To Protect Your Future
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The following notice is required by the IRS: Any U.S. Federal tax advice contained in this communication is not intended to be written or used, and cannot be used or relied upon, to avoid tax-related penalties under the Internal Revenue Code, or to promote, market or recommend to another any tax-related matter addressed herein.