Protecting assets having significant financial or emotional value, such as a family-owned business, real estate, vacation property and other assets, is critical when developing and implementing an effective estate plan. As ownership expands as the family grows, these assets become exposed to risks such as death, divorce or bankruptcy of a family member. One option to mitigate against risks of this nature is to use a family limited liability company or limited partnership (FLP) to own the asset.
The FLP can centralize the management of family assets in one entity, protect the assets from creditors and claimants of family members, and restrict the transfer of ownership interest to others. Further, it may provide a process for transferring ownership upon the death, divorce, disability or bankruptcy of a family member.
An FLP is also an excellent way to involve the next generation of family members in the management and decision making process related to family assets while the current generation is still in control. This may be accomplished if the current generation maintains majority control or owns a blocking interest, or if the FLP names a family elder as the company's manager.
Significant transfer tax savings are possible with an FLP. Gifts of minority interests in FLPs can produce discounts so that greater value may be gifted to the next generation. Restrictions on the sale or transfer of ownership interests may result in even larger discounts. Discounted gifts allow the owner to better leverage his or her annual exclusion and applicable exclusion from gift taxes. If the assets owned by the FLP rise in value, early gifting by the owner removes the post-gift appreciation from the owner's taxable estate. The transfer also removes income generated by the assets from the owner's taxable income and estate.