Family Limited Partnerships

The Family Limited Partnership has been described as the "Swiss Army Knife" of estate planning.

That's because this one tool performs so many valuable functions!

In a Family Limited Partnership, senior family members (i.e. parents or grandparents) contribute assets to a Limited Partnership in exchange for a small General Partner interest with management and control rights (typically 1%) and a large Limited Partner interest with no management rights (typically 99%).  Junior family members may also contribute assets as well. The senior family members then can give all or a portion of the Limited Partner interest to their children and grandchildren or trusts for their benefit.

Here are some of the advantages that a Family Limited Partnership can provide:

It may allow senior family members to transfer value to their children (and thus removing it from their estates for federal estate tax purposes), while retaining a certain degree of control over partnership investment decisions.  The junior family members can later be given control over investment decisions at such time as the senior family members determine is appropriate.  Control over partnership distributions can also be withheld from the junior family members as well, but under recent case law, it appears that it may be advisable not to leave such control in the discretion of the senior family members alone.

Instead of having numerous brokerage accounts for each child or trust for a child, there can be just one brokerage account held by the partnership, and the children or trusts for children can own partnership interests.  This may help save on account maintenance fees.

Transferring of out of state real estate to a partnership can avoid ancillary probate upon a partner's death.  Probate is avoided entirely if the partnership interest is held in a trust.

Unlike gifts of cash or securities, all the child has is a Limited Partner interest.  The child can't spend it.  If the child has creditor problems, all the creditor can get under the laws of most states is a "charging order" which simply provides that if and to the extent that any distributions are made from the partnership to the child, that distribution would have to be paid to the creditor until the debt is satisfied.  However, the partnership doesn't have to make any distributions.  In addition, while the charging order is in effect, IRS Revenue Ruling 77-137 may possibly be used to argue  that the creditor has to pay income taxes on the child's share of the partnership income, even if the income is not distributed.  Typically, this permits the child to settle the creditor claim for significantly less than otherwise may be possible.  

The partnership agreement can contain a mediation and arbitration provision to provide a mechanism for resolving intrafamily disputes over partnership management issues.  It can also contain a right of first refusal provision to prevent unwanted third parties from becoming partners in the partnership.

If the Limited Partner interest is contributed to a trust for the benefit for the child rather than outright, which is generally recommended, the Partnership assets are doubly protected by the charging order protection and the spendthrift trust protection in the trust.

Because of the lack of marketability and lack of control inherent in a Limited Partner interest in a limited partnership, valuation discounts may possibly apply for estate and gift  tax planning purposes.  The availability and amount of the appropriate discount, if any, would need to be evaluated on a case-by-case basis and the services of a professional appraiser are strongly recommended.

Under Florida law, non-publicly traded partnership interests are not subject to the Florida intangibles tax.  In addition, if the partnership is organized out-of-state and certain other requirements are met, the partnership will also not be subject to Florida intangible taxes on the partnership assets.

If the partnership is not conducting an active business in Florida, there is generally no reason that it needs to be organized in Florida.  While the Florida Statutes regarding limited partnerships are generally favorable with respect to asset protection and valuation discounts, the initial filing and annual maintenance fees paid to the state are much higher those in other states.  In addition, by organizing the partnership in another state, it may be possible to avoid Florida intangible taxes on the partnership assets, as discussed above.