Use of Family Limited Partnership:
Reduce the Value of Taxable Estate Overnight

The Family Limited Partnership ("FLP") is an ideal vehicle with which to transfer a taxable estate downstream to your family. FLPs allow you (the taxpayer) to have your cake and eat it, too. The FLP allows you to maintain control over all of your transferred assets until your death or incapacity. The IRS allows you to transfer the partnership units (i.e., similar to shares of stock) at a substantially reduced tax cost. The negative connotation associated with the limited partnerships of the 1980's is the exact reason why the FLP is so popular in family wealth transfer planning in the 1990's.

Two important features of the FLP are: (1) the lack of marketability of a limited partnership interest, and (2) the lack of control of the partnership by a limited partner. Both result in a substantial discount when valuing the limited partnership units. A lack of marketability exists when there is not a readily available purchaser to buy the interest at a fair market value. The lack of control is present because only the general partner may make the operating decisions. Therefore, the inability to sell the limited partnership units and the lack of control to force a sale of the partnership assets results in the limited partner's units having a substantially reduced value. The reduction is based on the lack of marketability discount and/or the minority interest discount applied at the time of valuation. To further reduce the value, the FLP will usually restrict the limited partner's ability to sell the units by a right of first refusal provision (i.e., buy-back provision).

Technically, the limited partnership is created under applicable state law. It is comprised of a general partner with unlimited liability, and the limited partners, whose liability is limited to their contribution to the partnership. The general partner, pursuant to the FLP agreement manages the partnership (i.e., controls the operation of the FLP). At inception, you and/or your spouse will typically own all of the limited partnership units. These units are transferred downstream to your family members through the use of the annual $10,000 gift tax exclusion and/or the current use of all or a portion of your $600,000 exemption equivalent ($1.2 million, if married).

The unlimited liability of the general partner may be mitigated or eliminated by the utilization of a corporation to hold the general partnership interest. The Florida Limited Liability Corporation may be desirable for this purpose. The entity is treated as a partnership for federal tax purposes and a corporation at the state level, at least for the purpose of the limited liability.

As the saying goes, the whole is greater than the sum of its parts. While it is true that upon dissolution of the partnership, the partners, general and limited, will receive a pro rata disposition of its assets the broken up pieces of the partnership pie are not worth their proportionate share of the total partnership assets during operation of the FLP. This fact allows you to substantially reduce the estate, gift and generation-skipping tax bite by undertaking family wealth transfer planning early.

The FLP is not the only vehicle appropriate to use in this planning. A general partnership may be less costly in the short term. A corporation or limited liability company may be easier to administer. An irrevocable trust may be simpler and more suitable for your needs. Your particular factual situation should be reviewed by your estate planner to determine the appropriate vehicle for the disposition of your estate.

Note, the FLP is an advanced planning technique, not to be confused or used in place of the revocable living trust or will. The FLP is to be used in conjunction with the basic estate planning documents to reduce the value of your overall estate while permitting you to stay in maximum control over your transferred assets.