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The major costs involved in setting up a FLP are attorney’s fees to establish the partnership and appraisal fees to establish both the underlying value and the appropriate discount. In addition, when partnership shares are transferred as gifts, an appraisal will again have to be made. This is one reason that the parents should consider large initial gifts right after the partnership is established. However, subsequent appraisal fees by the same appraisal firm should be considerably lower than the first ones. There will also be annual accounting fees for preparation of the partnership returns and the K1s that must be distributed to all partners.
The most attractive feature of the FLP is the ability of the donor to retain control of the assets. While key rights of a limited partner must be recognized, the general partner maintains all the managerial control over the partnership assets, determining when and whether to make income distributions or to reinvest the income. This control offered to the parent general partner makes this an acceptable vehicle for giving assets now, allowing appreciation to occur outside of the estate.
One disadvantage in gifting assets is the children lose the ability to get a step-up in basis at the death of the parent on the part of the partnership that was gifted. When the assets have a very low tax basis, this can reduce the tax benefits of the FLP. If assets are available with higher bases, these should be gifted. However, in 2010, with repeal of estate taxes, the step-up is eliminated and capital gains will apply after exclusions of
Since estate tax reduction is a major goal, consider gifting growth assets, that is, assets expected to appreciate substantially, rather than assets whose value is likely to remain stable or to fall. Common stocks have greater inherent appreciation potential than other asset classes, although this involves speculation. Cash and equivalents are less than desirable, because their values cannot be expected to rise significantly. Tax sheltered investments, such as municipal bonds, should not be gifted to family members in lower tax brackets.
FAMILY LIMITED PARTNERSHIP (focusing on asset protection)
Family limited partnerships (FLPs) have become a popular planning tool for the wealthy individual. A FLP has numerous advantages:
- The donors can give away wealth and still retain control;
- Transfers can be made at substantial discounts as compared to the value of the underlying assets;
- Restrictions can be placed on transfers;
- There is some protection from creditors.
To form a FLP, there must be at least one general partner and one limited partner. Typically, both husband and wife would serve as general partners. Siblings or parents could serve as limited partners.
While the discounts attributed to interests in FLPs for tax purposes are important when considering the appropriate vehicle to own and manage assets, protection of assets from outside influence is usually the primary reason for their use. Among the reasons the FLP is viewed as a viable, practical vehicle for asset protection are:
1) Flexibility of operations
2) Continuity of management
3) Asset protection
4) Consolidation of assets
5) Positive method of control
In order to reduce estate taxes, you would consider gifting growth assets, that is, assets expected to appreciate substantially, rather than assets whose value is likely to remain stable or to fall. Common stocks have greater inherent appreciation potential than other asset classes, although this involves speculation. Cash and equivalents are less than desirable, because their values cannot be expected to rise significantly.
Being a “partner” confers more than merely a property right in the assets of the partnership. It actually changes the nature of the property rights. Specifically, each partner is a coowner of specific partnership property, holding as a tenant in partnership so that the partner’s right in specific partnership property is not subject to attachment, except on a claim against the partnership itself. Accordingly, assets owned by the partnership in its own name are not subject to satisfying the obligations of its individual partners.
Moreover, a partner cannot normally be divested of that interest by an outside influence. So, while a judgment creditor might be able to divest a person of ownership in a share of stock in a corporation (or a bank account), a partnership interest is not subject to such divestiture.
The major costs involved in setting up a FLP are attorney’s fees to establish the partnership and appraisal fees to establish both the underlying value and the appropriate discount. In addition, when partnership shares are transferred as gifts, an appraisal will again have to be made. This is one reason that the parents should consider large initial gifts right after the partnership is established. However, subsequent appraisal fees by the same appraisal firm should be considerably lower than the first ones. There will also be annual accounting fees for preparation of the partnership returns and the K1s that must be distributed to all partners.
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