Family Limited Partnership (FLP)

What is Family Limited Partnership?

Family Limited Partnership (FLP) meaning indicates a special type of arrangement in which family members are known to pool money for running some business project. In the given arrangement, every family member is known to buy specific shares or units of the given business.

At the same time, the members are able to profit with respect to the number of shares owned by the member –as per the outline of the partnership operating agreement.

An Insight into FLP

In a typical scenario of Family Limited Partnership, there are two partners-

General Partners

They are known to own the business’ largest shares. At the same time, they are responsible for management tasks on a daily Basis. Some of these tasks might include investment transactions and monitoring all cash deposits. The general partner can also go forward with taking some Management Fee from the respective profits in case the same has been outlined in the agreement.

Limited Partners

These do not have any sort of management responsibility. Rather, they go ahead with buying shares in exchange for interests, dividends, and profits of the business as generated by the FLP.

FLP is known to vary depending on the nature of the particular business.

Benefits of Family Limited Partnerships

There are specific Gift Tax and estate advantages of the FLP. Several families are known to establish FLPs for passing the overall wealth down to the subsequent generations and securing tax protections effectively. Every year, individuals can consider gifting FLP interests as tax-free to other members or individuals up to the tax exclusion of annual gift.

Exclusion of Future Returns from Estate Taxes

Additionally, the given assets are known to effectively leave the estates of the couples –as per the IRS, such that future returns tend to be excluded from the respective estate Taxes. The children and grandchildren of the couple would get benefits from the interest, profits, or dividends generated from the respective FLP. Therefore, it helps in preserving wealth for the subsequent future generations.

Being general partners, the couple can consider setting stipulations in the given partnership agreement for protecting the respective gifts from being mismanaged or squandered. For instance, they could end up setting a specific rule that would state that the gifted shares cannot be sold or transferred until the beneficiaries are able to reach a particular age. If the beneficiaries tend to be minors, the shares can be then transferred with the help of the UTMA (Unified Transfers to Minors Act) account.

Due to the overall structure of the FLPs along with the tax laws that are known to govern the same might be complex, families are recommended to consult tax professionals and qualified accountants before the establishment of an FLP.