A family limited partnership was once a rather esoteric way for wealthy Orlando families to centralize the management of real estate and various pots of money. But this is not a normal tax year.
Sometimes managing family assets is like, well, running a business. Then again, some families actually do run their families like businesses and have enjoyed significant tax advantages by doing so through the use of the Family Limited Partnership.
A recent article in The New York Times titled “In an Unusual Tax Year, the Wealthy Turn to Partnerships” explores the power of the Family Limited Partnership (FLP). Properly structured, the FLP binds the family into a business arrangement (which is not always a good thing for a family) and, in doing so, allows for the longevity of a business entity, the decreased valuation allowable to private companies, and the simple ability to pool resources for higher investments.
When used correctly, there is much to be said about the FLP structure. On the other hand, there also are limitations and even outright warnings. For one, no business can safely exist without a purpose, and to form your FLP without a discernible purpose beyond avoiding estate taxes will certainly raise the ire of the IRS. Furthermore, as already intimated, it means the family must act with the swiftness and assurance of a business in their investments. Unfortunately, not all families are capable of acting like a “business.”
In the end, we face an uncertain and unpromising future in estate and gift laws (and a veritable “fiscal cliff” as a nation for related reasons). Nevertheless, at present we have extremely favorable lifetime gift tax exemptions ($5.12 million) for the remainder of 2012.
This may be the perfect storm to consider harnessing this powerful tool to generate some security for your family and family investments.
Reference: The New York Times (July 6, 2012) “In an Unusual Tax Year, the Wealthy Turn to Partnerships”