If you are a business owner, you have a unique set of estate planning concerns that will invariably include succession issues. One or more of your children may be involved in running the business, and continuity will be a priority.
There is also the matter of asset protection, and it is particularly important for certain types of business owners, professional practice principals, and investors. A family limited partnership (FLP) is a structure that can be the solution, and we will provide an overview here.
Control Everything, Own Nothing
As the name would suggest, a family limited partnership is comprised of people that are in the same family. Let’s say that you own a large construction company, and you want to establish an asset protection structure that will include relatively seamless ownership succession.
You can establish a family limited partnership, and you would be the general partner. Family members that you bring into the partnership would be limited partners. As the general partner, you would have absolute, sole decision-making authority on every level.
When the business is transferred to the partnership, the control would be yours, but there will be a useful cushion of separation. Your personal property will be protected if the business is the target of a lawsuit for some reason, and the reverse will also be true.
It is possible to use multiple family limited partnerships if it will be beneficial in light of your holdings. If you own a construction company and an apartment building, you can convey the rental property into a separate family limited partnership.
A litigant that is suing the owner of the apartment building would have no access to the construction company or the partners’ personal assets.
With regard to succession, you can distribute ownership interests to the partners that will eventually be running the business. This can facilitate a smooth transition, but you would maintain control of the decision-making.
Estate Tax Efficiency
The federal estate tax carries a 40 percent top rate, so it can have a significant impact on your legacy if you are exposed. Your level of exposure or lack thereof is based on the value of your estate as it compares to the estate tax credit or exclusion.
In 2022, the exclusion is $12.06 million. This is the amount that can be transferred tax-free, and the rest would be subject to the estate tax unless you take steps to mitigate the burden.
The exclusion will stay at this level for the next few years indexed for inflation unless there is an unlikely change via legislative mandate. However, this is the highest it has ever been, and it is in place because a provision in the Tax Cuts and Jobs Act of 2017.
This provision is going to sunset on January 1, 2026. At that time, the exclusion is going to fall back to the 2017 level of $5.49 million adjusted for inflation.
There is a gift tax that is unified with the estate tax, and this exclusion is a unified exclusion applies to your estate and large transfers that you make while you are living. However, there is an additional $16,000 per person, per year gift tax exclusion that is separate from the unified exclusion. This can allow for tax-free transfers on an annual basis.
Since the limited partners have no control or marketability, ownership interests are discounted from a transfer tax perspective, and this is another benefit that FLPs is provide.
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