Could the Use of an FLP Lead to the Next Great American Success Story?

Could the Use of an FLP Lead to the Next Great American Success Story?

Are you thinking of starting a business but do not have enough capital?  Consider creating a family limited partnership (FLP).  By pooling funds with family members you can open a business not otherwise possible due to lack of money or experience.  In 1956, Warren Buffett pooled funds totaling just $105,000 with seven family members, of which a mere $100 was his own money, to create what is now one of the great American success stories.

An FLP is also a powerful tool utilized by high net worth families to move wealth from one generation to another.  It allows the transfer of an ownership interest to other family members, the retention of business control and helps ensure continued family ownership of the business. Typically, senior family members contribute assets such as existing businesses and income-producing assets in exchange for small general partner interests and a large limited partner interest.  The General Partner(s), typically one or both parents, retain control over decisions and distributions of income or capital, and gives all or a portion of the limited partner interests to their children and grandchildren, or trusts for their benefit. Transferring limited partner interests to family members reduces the taxable estate of senior family members, shifts some of the business income and deflects growth to the younger generations.  At death, only the value of one’s ownership interest in the partnership will be included in the gross estate.  Benefits include:

· Shares (LP interests) can be gifted to family members over the years, thus taking advantage of annual gift tax exemptions.

· A valuation discount applies to transfers of limited partnership interests through gifts or sales to descendants due to the characteristics of lack of marketability and control.

· Assets held in the FLP are not owned by individual partners.  Therefore, these assets cannot be attached by the personal creditors of a partner and can be protected from claims of a spouse in the case of divorce.

· The FLP can be used to encourage entrepreneurship in the younger generations.  For example, should a son or daughter wish to create a new company, he or she could request a loan or distribution from the partnership to start the new venture.

· Pooling investments together into an FLP can lower legal, accounting and investing costs. It can also allow junior family members to participate in private placement investments available only to “accredited investors” that otherwise might not be available to them individually.

Proposed regulations by the Treasury Department and the IRS were released in August 2016 which would impact estate planning for owners of family controlled entities.  If they become final, it would dramatically limit the use of valuation discounts for FLPs or other family business transfers where the family will retain control before and after the gift or bequest takes place.

Many practitioners now doubt the likelihood of these proposed regulations becoming finalized given the results of the 2016 election.  With Republican control of both houses of Congress and the Executive branch, these proposed regulations may languish without ever becoming final.

So, until any proposed regulations become effective, FLPs are good planning tools for the efficient use of a family’s lifetime gift tax exemption and the senior generation’s annual gift tax exclusions. A gift tax exemption is the total amount that can be given away by an individual over his or her lifetime to any number of people free from gift taxes.  For 2017, the exclusion is $5,490,000 per individual or $10,980,000 per couple.

If you are contemplating the creation of an FLP, consult with your tax and legal advisors to determine if this vehicle makes sense for your wealth transfer plan.

Articles and Commentary

Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.


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