As a person with significant financial resources, you need to consider estate tax efficiency and asset protection when you’re planning your estate. If these are your objectives, you should consider establishing a Family Limited Partnership.
A Family Limited Partnership is comprised of a general partner or partners as well as limited partners. Let’s say that you start a partnership and you convey assets into it. Your intention is to gradually transfer assets to your loved ones in a tax efficient manner. You also want to protect the assets that you convey into the family limited partnership from liability.
Before we proceed, we would like to explain a bit about federal transfer taxes. The estate tax and the gift tax are unified, and they carry the same 40% maximum rate. Therefore, there is no tax advantage of So, if you try to give large gifts while you are living in an effort to avoid the estate tax, you will run have the same into the gift tax, and there is essentially no difference.
There is a $5.34 million unified exclusion. The first $5.34 million that you give away either while you are living or after you pass away will be excluded from transfer taxes.
We also have an annual gift tax exclusion that exists outside of this unified exclusion. Right now the amount of this annual exclusion is $14,000 per year, per gift recipient.
Now, back to Family Limited Partnerships. You could give shares in the partnership to each of the limited partners equaling up to $14,000 in value without incurring any gift tax responsibility. This is part of the appeal.
In addition, if you want to give gifts to the limited partners that exceed $14,000 in value in a given year you can do so at a tax discount. The IRS won’t assess the value of the gifts at full face value because the limited partners have no say in how the partnership is run. They can’t give themselves distributions. The general partner has full rights of control and marketability.
Assets that have been conveyed into a Family Limited Partnership are no longer the personal possessions of the general partner. Therefore, they are protected from attachment. Creditors going after the personal assets of the general partner or any of the limited partners will have to look elsewhere.
If a charging order was obtained, a creditor could attach distributions, but the general partner could choose not to give distributions to the besieged partner under these circumstances.
One thing you should know about Family Limited Partnerships is that you cannot create and fund the partnership after you have become aware of legal actions against you. This can be construed as a fraudulent conveyance, and it is illegal to react after-the-fact.
These are a few brief words about the value of Family Limited Partnerships. If you’re interested in a wealth preservation consultation contact us to schedule an appointment.