FREQUENTLY ASKED QUESTIONS
REGARDING FAMILY LIMITED PARTNERSHIPS

Why Use A Family Limited Partnership?
There are a number of reasons to utilize a Family Limited Partnership, including asset protection planning, continuity of management, control of family assets, and the transfer of assets to family members at reduced gift and estate tax costs.
What Is A Family Limited Partnership?
A Family Limited Partnership is nothing more than a variation on the standard limited partnership in which the partnership interests are owned by members of the family. Typically, the partners each contribute assets to the Family Limited Partnership in exchange for partnership interests. The parents of the family serve as the general partner(s) and own  and control the partnership and its activities. The limited partners the parents and children or trusts for children hold the bulk of the equity in the form of limited partnership interests. The general partner, primarily the parents, who are entitled to compensation, control the Family Limited Partnership and make all decisions concerning the partnership, and its assets. The limited partners are passive investors and have no management control but they do enjoy limited liability for the debts and liabilities of the partnership.
There may be more than one individual general partner or, alternatively, the general partner could be an entity such as a corporation or LLC.
In the event there is a distribution of profits out of the Family Limited Partnership they are made by the general partners to all partners in proportion to their ownership interests. The partnership is a "passthrough" tax entity so that the partnership's income, deductions and losses are shown on the tax returns of the individual partners and they pay any tax on profits from partnership operations. The partnership usually remains in place until the expiration of a 50-year term as designated in the partnership agreement, unless the partners unanimously vote to terminate it at an earlier date.
Why Have A Family Limited Partnership?
In many cases, direct gifting of an asset to a child or other recipient is undesirable because they may not be mature enough to manage the asset, the asset may not be easily divisible among multiple recipients, or the person making the gift may wish to retain control over the asset i.e., the General Partner(s). Instead of gifting the asset itself, one may make a gift of limited partnership interests in a Family Limited Partnership to which the asset has been transferred. Typically, the donor is the general partner(s) of the Family Limited Partnership and, consequently, retains control over the asset.
Who Will Manage and Control The Family Limited Partnership?
Since the general partner(s) manage and control the Family Limited Partnership they (or it) will select the partnership’s investments; decide when income should be distributed to the partners; authorize the admission of new partners or additional capital contributions and approve the transfer of an existing partnership interest to a third party.
Who Will Maintain The Family Ownership of Assets?
The ability of a family member, who is a partner to the Family Limited Partnership, to transfer his or her partnership interest is generally restricted in order to maintain family ownership of the Family Limited Partnership and its assets. Many partnership agreements contain buy-sell provisions that effectively keep the partnership interests in the family in the event of the death, creditor problem or divorce of a partner.
Are There Estate And Gift Tax Valuation Discounts?
Yes!  For gift and estate tax purposes, the value of a limited partnership interest is the price at which the interest can be sold to a hypothetical "willing buyer." Due to the restrictions on transfer of a limited partnership interest and because no partner has the unilateral right to liquidate the partnership and take his share of the partnership assets the fair market value of the partnership interest is worth significantly less than the value of the assets held inside the partnership. The difference in the value of the partnership assets and the value of the limited partnership interests can often amount to 35% for cash or cash equivalents or more, and up to 65% for assets that are subject to market fluctuations.
This discounting is also valuable for making gifts, as you are allowed only a $14,000 gift tax exclusion, per person each year.  Let’s assume that the underlying assets of the Family Limited Partnership are worth $2,000,00.00.  A one (1%) percent  interest in that $2,000,000.00 Family Limited Partnership would be equal to $20,000.00.  If we apply the discount that is available to that one (1%) percent recipient (a minority interest discount and a lack of control discount) and further assuming that the gift is in cash you could give up $18,900.00 of value to any member of the Family Limited Partnership, and not exceed the gift tax exclusion each year.
The size of the discount depends on the nature of the partnership and its assets, therefore if the asset is something other than cash and subject to market fluctuation such as commercial buildings, real estate and stocks and bonds then the discount is even greater as a result of the uncertainty of market fluctuation. The end result of this type of transaction  will significantly reduce the tax liabilities to the heirs upon the death of the general partners and will increase the uniform exemption amount that each party may give to members of the Family Limited Partnership.
Does The Family Limited Partnership Provide Creditor Protection?
Yes! A Family Limited Partnership will help put the family assets beyond the reach of creditors. If a creditor of a limited partner obtains a charging order, as distinguished from a judgment which can not be obtained against a Family Limited Partnership, the creditor's only right is to receive property actually distributed out of the partnership to that partner. Since the general partner makes that determination and decides what portion of the Family Limited Partnership’s income should be retained and reinvested in the Family Limited Partnership rather than distributed to the partners, the creditor is effectively prevented from receiving anything. In addition, the creditor must pay the tax liability associated with the interest of the limited partner against whom he has taken a charging order. Accordingly, limited partnership interests have been unattractive to creditors of a limited partner. However, if the assets were placed in the partnership with the intent of hindering a creditor in the collection of amounts already owed to him then the law will allow the creditor to reach the partnership assets under the so-called “Uniform Fraudulent Conveyances Act” that has been adopted in California and most other states.

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