Family Limited Partnerships are a form of estate planning that allows an individual to reduce estate and gift taxes while at the same time maintaining some level of control over their property.
The process involves creating a business entity called a partnership and then transferring property to the partnership. There is a host of different types of property that can be transferred to a partnership, including real estate.
When a Family limited partnership is formed, there are two types of partners: limited partners and general partners.
Limited partners do not have a right to control or manage the partnership or the property within the partnership. Limited partners have a right to share in the profits of the partnership and if the partnership is dissolved, they have a right to the proceeds and the property of the partnership. Limited partners are not personally liable for any debts or obligations of the partnership.
General partners control and manage the partnership. General partners are personally liable for the debts and obligations of the partnerships. The Florida legislature has created what is called a “Florida Limited Liability Partnership”, which may be used to limit this exposure to liability.
When a person transfers property into a partnership, they typically designate themselves a general partner so that they can still maintain control over the property in the partnership. Thereafter, they will transfer limited partnership interests to their children or other beneficiaries.
The tax benefits are illustrated in the following example:
Bob owns a rental property worth $1,000,000, which he transfers to his Family Limited Partnership. Bob has 3 children whom he each gives a 20% limited partnership interest to. Bob now owns 40% and his children own 60%. Bob will have to report to the IRS this gift. Based on the value of the property transferred into the property, the gift would be $600,000.00. However, since the children have a limited partnership interest in the business and cannot freely transfer their interests the IRS allows Bob to take a discount on the value of the interest gifted. The discount is applied because of the lack of control the children have and the lack of marketability (or ability to sell) of the partnership interests. Thus, Bob will not have to report a gift in the amount of $600,000.00. Furthermore, the portion of the property which Bob transferred will no longer be included in his taxable estate when he passes away.