Strategies & Techniques for Estate Planning


Family Limited Partnership (FLP)

Over the past ten years, the Family Limited Partnership (FLP) has risen from obscurity as a little known tax loophole into the preeminent vehicle for asset protection and estate planning. An article in Forbes magazine extolling the benefits of the FLP — titled "Cut Your Estate Taxes in Half" — claimed that individuals were successfully using this technique to discount the value of their estate by up to 90 percent.
The FLP can be used to create a powerful strategy for asset protection and for realizing estate tax and income tax benefits.

Tax Treatment of Partnerships
Since the partnership is a "pass through" entity, there is no potential for income tax on it. Unlike corporations and irrevocable trusts, a partnership is not a taxpaying entity. A partnership files an annual informational tax return setting forth its income and expenses, but it doesn’t pay tax on its net income. Instead, each partner’s proportionate share of income or loss is passed through from the partnership to the individual. Each partner claims his share of deductions or reports his share of income on his own tax return.
This avoids the potential for double taxation that is always present in a C Corporation. Typically, when a business is expected to show a net loss rather than a gain, the partnership format is used so that the losses can be used by the partners. Limited partnerships have always been used for real estate and tax shelter investments in order to pass the tax deductions through to the individual investors. These losses are then used by the partner to offset other income he might have. Although the Tax Reform Act of 1986 now limits the ability to immediately deduct losses from "passive activities" to offset wages or investment income, the partnership format may still be desirable if the circumstances of the individual partner are such that he is able to take advantage of these losses.
The rules regarding the taxation of partnership activities are lengthy and cumbersome. As a general rule, however, transfers of property into and out of a partnership will not ordinarily produce any tax consequences.

Lawsuit Protection
The Family Limited Partnership is an outstanding device for providing lawsuit protection for family wealth. When used as part of a properly designed overall strategy, an unsurpassed level of asset protection can be accomplished.
Under the typical arrangement, the FLP is set up so that Husband and Wife are each general partners. As such, they may own only a 1 or 2 percent interest in the partnership. The remaining interests are in the form of limited partnership interests. These interests will be held, directly or indirectly, by Husband, Wife, or other family members, depending upon a variety of factors which will be discussed.
After setting up the FLP, all family assets are transferred into it, including investments and business interests. When the transfers are complete, Husband and Wife no longer own a direct interest in these assets. Instead, they own a controlling interest in the FLP, and it is the FLP which owns the assets. As general partners, they have complete management and control over the affairs of the partnership and can buy or sell any assets they wish. They have the right to retain in the partnership proceeds from the sale of any partnership assets, or they can distribute these proceeds out to the partners.

Creating the FLP
The first step in creating the Family Limited Partnership is the preparation and filing of the Certificate of Limited Partnership with the Secretary of State. The form asks for the name of the limited partnership. This name should be cleared in advance with the Secretary of State’s office because the filing will not be accepted if the name is similar to another name already on file. The Certificate of Limited Partnership also asks for the name of a designated Agent for the Service of Process, which is the name and address of a person (or company) who is authorized by the partnership to receive service of process if the partnership is sued for any reason. Any family member residing in the state can be designated as the agent. There are also companies that will, for a modest fee, act as the designated agent for these purposes.
The form also asks for the names and addresses of all general partners of the partnership. The names of the limited partners are not required. Since this document is a matter of public record, the names of the general partners will be publicly available but not the names of the limited partners. Along with the Certificate of Limited Partnership, each state requires a filing fee which is usually about $85–$125.
When the Secretary of State’s office receives the properly filled out form, with an acceptable partnership name, the Certificate will be filed. At this point, the partnership will be legally formed. You should request that a certified copy of the Certificate of Limited Partnership be returned to you, and your copy should be stamped with the filing date. It is essential that you have at least one certified copy for opening a bank or brokerage account, or for the purchase or sale of real estate in the name of the partnership.

Summary
The Family Limited Partnership offers a unique capability to realize a variety of planning goals:
* Assets held in the FLP are effectively shielded from potential claims.
* Income taxes can be shifted to lower bracket family members or entities such as corporations and trusts to take advantage of deferral and savings techniques.
* Estate taxes on accumulated wealth and future appreciation can be minimized or eliminated by gifting discounted interests in the FLP to children or trusts established for their benefit.
The FLP provides a convenient and flexible format as the cornerstone of your overall plan. In the succeeding sections we will see how Limited Liability Companies and trusts can provide additional opportunities to create asset protection and tax savings strategies.