Family Limited Partnership (FLP) - Estate Planning Tool
posted Aug 9, 2018 by Dave Desmarais, CPA/PFS, MST, MBA, AEP® in the Global Tax Blog
Some of the most valuable strategies for reducing potential estate tax liability involve “squeezing” and “freezing” assets — in other words, discounting assets in various ways and locking in lower asset values.
Trusts aren’t your only squeezing and freezing vehicles. Setting up a family limited partnership (FLP) or family limited liability company (FLLC) — for simplicity, let’s refer to them both as FLPs — can reduce gift and estate taxes by taking advantage of valuation discounts.
How do they work?
You transfer business interests, marketable securities, real estate or other assets to the FLP and retain a small general partnership interest (such as 1%) and a large limited partnership interest. You then transfer limited partnership interests to your children. This removes the value of those interests from your taxable estate (and future appreciation on them) yet you retain management control.
Because the limited partnership interests are relatively unmarketable and provide your children with no control over the FLP, significant valuation discounts can be applied for gift tax purposes. But to pass muster with the IRS, there must be a legitimate nontax reason for forming the partnership, such as more effective management of the family’s assets. It’s also critical to properly set up and operate the FLP.
The utility of FLPs as an estate planning tool had been at risk due to some proposed IRS regs that would have curtailed their tax benefits in many situations. But the U.S. Treasury has recently announced that those regulations will be entirely withdrawn.
Learn more about setting up a family limited partnership here.
There are other ways to “squeeze and freeze” assets – learn more about them in our blog “Tax Cuts and Jobs Act Estate Planning Strategies” As always, our Private Client Tax Services Team can help you navigate the rules.