After years of hard work, you might have built a business worth a substantial sum. Or, you may have real estate or investment portfolios that generate significant income. As you think about passing these on to your family, you will want to make sure you preserve the value of these assets. Yet, you are likely concerned about the taxes that both they and your estate will pay upon transfer. Establishing a family limited partnership, though, could help you ease these tax burdens while you are living.
The structure of family limited partnerships
Family limited partnerships have two different categories of owners. If you are a general partner, you are your partnership’s primary owner and are responsible for managing its assets. In most cases, your beneficiaries will be limited partners. As limited partners, they will have no control over the partnership. But they will own shares in the partnership, which entitles them to part of the profits, interest income and dividends it generates. In most cases, though, they cannot sell these shares, unless to another family member.
The tax benefits of family limited partnerships
As a general partner, you can transfer shares of your family limited partnership to your limited partners without paying the gift tax. You will avoid it so long as your gift to each partner does not exceed the annual exclusion – $15,000 for individuals and $30,000 for married couples.
Since limited partners have little control over their shares, the IRS will discount them from their net asset value for tax purposes. This arrangement is particularly helpful if your partnership’s value could subject it to estate taxes. When properly established, it can minimize these taxes – or eliminate them altogether.
While a family limited partnership can protect your wealth, setting one up can be difficult. A legal professional can help you understand the steps you must take to create a sound, workable arrangement.
Notice: We are providing this as general information only, and it should not be considered legal advice, which depends on the facts of each specific situation. Receipt of this content does not establish an attorney-client relationship.