TAX NEWS - 2010

Family Limited Partnership (FLP) For Estate Planning and Asset Protection

Benefical Or Risky?

If you have capital of one million dollars (or even less in certain circumstances) to contribute, and toch in other assets sufficient to support you for the rest of your life, you may consider to the establishment and operation of a family limited vennootschap (FLP) to the members of your family. Yes, an FLP is only for rich people, which is an important asset and can afford to thousands of attorneys pay to be set to cover expert appraisal costs, and bankroll expenses to the well maintained of it.

It can be as simple as husband and wife donors to create a FLP with $ 1,000,000 or loss of assets or property as rental property (but not the main residence), cash, securities, business interests, etc. As general partners in a FLP, the husband and wife can hold ten (10) percent general partnership interest and ninety (90) percent limited interest. The husband and wife, as general partner interest of maintaining partnership , then transfer limited partnership units, the remaining 90% of their partnership interests children.

Benefits of FLP

A. Control over Transferred assets: the FLP operating agreement governs the administration, management, investments, and the distribution of income and assets upon termination.  It may also restrict the transfer of partnership units or general partners' interests others. The parents would manage and control the investments of the partnership assets at the exclusion of limited partners-children. More importantly, the general partners decide when and amount of partnership profit can be distributed to the partners.

They can also prevent the transfer of partnership units or interests outside the family.  The general partners can further constitute an irrevocable trust in which their general partnership interests to be transferred and managed by an independent trustee or a unit as the general partner are managed by a fiduciary.

B. Discounted Independent Valuation of gifts to children: Parents may tax-free gifts to give to children or grandchildren of $ 12,000 (or $ 24,000 gift divided by both parents) each year.

These annual gifts may take the form of the limited partnership units in an FLP, thereby taking advantage of the annual $ 12,000 gift tax exclusion to lower estate taxes. In under an FLP, the parents may continue to benefit from gift and inheritance tax valuation on minority interests, resulting in lack of control and lack of marketability (non-cash) to reduce overdracht taxes. A expert's valuation is a 20 percent discount to determine the value of a partnership unit as a gift, due to lack of control, and another 20 percent discount for lack of marketability.

Such rebates can not normally be done in a gift of equal value without more data op estate values of the partnership units belonging to children. The parents may also be reduced through the above reductions, resulting in reduced property tax where are they way .

C. Income-Tax Advantage: An FLP, as a partnership is a pass-through mechanism, which partnership income and deductions directly charged to the partners, general and limited, and taxed on their individual tax rates. Thus , an FLP may shift the proportion of the income of the partnership of the parents are relatively higher tax rate to lower rates of income tax of the children with limited incomes.

Moreover, an FLP can income distributions from limited partners, children to help them help paying taxes attributable to the FLP.

D. Asset Protection Benefits: Another benefit of an FLP is asset protection of the general and limited partners of their creditors, seeking judgments against the underlying partnership to implement.  But the lack of business purpose of an FLP, the court reason to break through her veil, and find it an alter-ego of the general partners. Indeed, general and limited partners own only general or limited partnership units or interests (personal property ) in an FLP.

They do not directly own (real or personal property) of the partnership interests gifted FLP. Limited minor children be children through irrevocable trust that additional asset protection, the general partner and donor children creditors.