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Imagine an estate and tax planning strategy so effective
that the IRS has taken aim at it. Fortunately for small
-business owners, this strategy actually does exist. It's
called the family limited partnership (FLP), and it might
allow you to shift ownership of assets (and perhaps some
income) to family members and potentially protect those
assets from creditors.
A FLP creates an entity managed by a general partner (typically
the business owner or an entity controlled by the owner
such as a corporation or limited liability company) for
the benefit of limited partners such as a spouse, children,
family trust, or trusts created for your children.
Because the limited partners have no control over the assets
and the partnership shares are illiquid, the assets' value
is typically discounted between 35 to 40 percent from fair
market value.' Thus, a one-tenth share of a $100,000 rental
property can be valued for as little as $6,000 for tax and
estate planning purposes. Other benefits of a FLP include:
CONTROL The general partner deter-mines how assets are
invested and whether to keel) or distribute partner income
ASSET PROTECTION If a partnership is created and funded
prior to situations that prompt a creditor's claim, its
assets can potentially be protected against attachment by
creditors.
ESTATE TAX SAVINGS By shifting ownership to the limited
partners, the portion of' the partnership Subject to estate
taxes can be reduced, often significantly. Gift taxes may
be applicable.
INCOME TAX SAVINGS Income from the partnership is taxed
at the recipient's rate, which for children or college students
might be much lower than the general partner's.
PROTECTION IN DIVORCE PROCEEDINGS A limited partnership
interest becomes property of' the limited partner and thus
is generally not considered joint property during divorce
proceedings in some states.
Closer IRS scrutiny may limit valuation discounts in the
future. If you have considered using a FLP in your estate
and tax planning, it may be time to consult a professional
with expertise in establishing such partnerships.
1) "Abuses of Estate Vehicle Raise IRS Ire:'
Investment News, June 1, 1998
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