ESTATE PLANNING, WILLS & TRUSTS
FAMILY LIMITED PARTNERSHIPS
Family Limited Partnerships and Family Limited Liability Companies
A Family Limited Partnership (FLP) and Family Limited Liability Company (FLLC) are essentially the same thing. When established as a Partnership, the membership interests generally consist of a small General Partnership interest (1%) with the remaining interests being Limited Partnership interests (99%). When established as a Limited Liability Company, the membership interests generally consist of a small Voting membership interest (1%) with the remaining interests being Non-Voting membership interests (99%). The choice of entity varies from state to state and from practitioner to practitioner based on nuances contained in the particular statutes which allow the creation of these entities and which govern their management and the rights of the members.
Lack of Control and Lack of Marketability
Of significant importance, is the fact that the Limited Partners or Non-Voting Members, while having substantial economic interests in the entities, have no ability to control, direct or otherwise be involved in the operations or management of the entity, or to dispose of their interests in the entity. These rights, and their lack thereof, are generally expressed in terms of lack of control and lack of marketability. Because of the lack of control and lack of marketability of the interests, the value of the Limited Partnership interests or Non-Voting membership interests are generally discounted as a percentage of the total overall value of the entity.
Discounts for Lack of Control and Lack of Marketability
A simple example of this would be the establishment of a FLP or FLLC with $1,000,000 worth of assets. After being established, the entity would have an overall fair market value of $1,000,000. The Limited Partnership interests or Non-Voting membership interests would have a fair market value that would be discounted, for example, thirty (30%) percent. The Limited Partnership interests or Non-Voting membership interests of $1,000,000 x 99% or $990,000 x 70% (the fair market value after the discount of thirty 30% percent) for a total value of $693,000.
Gifting and Selling Limited Partnership or Non-Voting Interests
In the above example, the Limited Partnership interests or Non-Voting membership interests could then be gifted to family members, sold to an Intentionally Defective Grantor Trust (IDGT)(which the General Partner or Voting Member is the Grantor of), or both. For gift tax purposes, the value of the gift in the above example would be $693,000, and this would be the amount of gift reported. For purposes of a sale, the value of the consideration that would have to be paid back to the seller would be the same.
Sales of Property to Grantor Trusts
Since the Grantor of an Grantor Trust is deemed to be the owner of the trust property for income tax purposes, sales of property (the Limited Partnership interests or Non-Voting membership interests) between the Grantor and a Grantor Trust are ignored for income tax purposes and no taxable income or loss is recognized. As long as the Grantor receives adequate consideration for the sale of assets to an IDGT, the Grantor benefits from the elimination of estate tax considerations as well.
Asset Protection Features
Another benefit of the FLP and FLLC is the layer of protection that they provide against future creditors or spouses of failed marriages. Generally, creditors cannot force cash distributions, vote or own an interest in a FLP or FLLC without the consent of the General Partner or Voting Member. In the case of a failed marriage, where a Limited Partner or Non-Voting Member ceases to be a member of the family, a properly drafted FLP Agreement or FLLC Operating Agreement can require the interest be transferred back to the FLP or FLLC. This preserves the integrity of the FLP or FLLC and ensures that assets of the FLP or FLLC are protected and maintained within the family.
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