A Family Limited Partnership (FLP) is an advanced estate planning strategy that families often use to manage and protect their assets while also minimizing their tax liabilities. Understanding the intricacies of FLPs, how they function, their impact on estate planning and administration, and how disputes within them can be resolved through mediation is crucial for families considering this path.
What You Should Know About Family Limited Partnerships
An FLP is a form of limited partnership among family members. It is a legal entity established to hold assets such as real estate, investments, or family businesses. The structure of an FLP is divided into two types of partners: general partners, who manage the partnership and have full liability, and limited partners, who are typically passive investors with liability limited to their investment in the partnership.
How FLPs Work
The operation of an FLP begins with transferring assets into the partnership. The family members who contribute assets usually receive interest as general or limited partners. The general partners manage the FLP, making decisions about the assets, while limited partners have no role in management and enjoy limited liability.
To establish an FLP in California, you must file a Certificate of Limited Partnership with the California Secretary of State. The partnership must also create a Limited Partnership Agreement, which outlines the roles, responsibilities, and distribution rules among the partners. This agreement is not filed with the state but is a critical internal document.
This structure allows for the efficient transfer of wealth to younger generations while enabling the senior family members to retain control over the assets. It also provides an avenue for consolidating family assets into a single entity, making management more straightforward and centralized.
Impact on Estate Planning and Administration
FLPs can significantly affect estate planning and administration. They allow for the gradual transfer of assets to heirs without relinquishing control, which can be particularly advantageous for families with substantial real estate holdings or businesses.
One of the primary advantages of an FLP in California is the potential for estate and gift tax savings. Parents can transfer assets into the FLP and then gift limited partnership interests to their children or other beneficiaries, potentially at a reduced value for gift tax purposes due to lack of control and marketability discounts. This strategy can lower the taxable value of their estate.
Furthermore, FLPs in California offer a degree of creditor protection for the limited partners. Creditors of a limited partner generally cannot seize the partnership assets or take over the limited partner’s interest in the partnership; instead, they may only obtain a charging order against distributions made from the arrangement to the debtor partner.
However, the Internal Revenue Service (IRS) scrutinizes FLPs closely to ensure they are not merely tax evasion schemes. Other potential complications of a family limited partnership include:
- Legal and Tax Compliance: Proper setup and operation in compliance with both California law and federal tax regulations are critical to avoid scrutiny by the IRS and ensure the partnership achieves its intended benefits.
- Management and Control: The general partner(s) have significant control over the partnership, which can lead to disputes among family members if interests or management styles clash.
- Costs: Establishing and maintaining an FLP can involve substantial legal, accounting, and administrative costs.
These issues make the formation and operation of an FLP executed with genuine business purposes and in compliance with all legal requirements essential. In addition, families must institute a non-adversarial dispute resolution method within the partnership to avoid unnecessary legal battles.
Resolving FLP Disputes Through Mediation
The power structure of an FLP can lead to a variety of possible disputes among family members. Some of the most common causes for these disagreements include management decisions, the distribution of income, or the transfer of partnership interests.
Litigation for FLP disagreements can be costly, time-consuming, and damaging to family relationships. That’s why including a mediation clause in your partnership agreement can be so valuable.
Mediation offers a confidential, less adversarial alternative for resolving disputes. In mediation, a neutral third party helps the disputing parties find a mutually acceptable solution. This process can preserve family relationships, reduce legal expenses, and provide a more flexible, personalized resolution to conflicts within an FLP.
Do You Need an FLP?
Deciding whether an FLP is right for your family depends on several factors, including the nature and value of your assets, your estate planning goals, and your family dynamics. An FLP can be a powerful tool for asset protection, estate tax minimization, and family business succession planning. However, it requires careful consideration, proper structuring, and ongoing compliance with legal and tax obligations.
Consulting with estate planning professionals, including attorneys and tax advisors, is crucial to determining whether an FLP fits your family’s needs and objectives. They can provide guidance on the formation, operation, and benefits of an FLP, ensuring that your estate planning strategy is effective and compliant with current laws and regulations.
Consult Experienced Estate Planning Attorneys and Mediators
Family limited partnerships offer a versatile and strategic option for estate planning and asset management. By understanding how FLPs work, their benefits, and the mechanisms for dispute resolution, families can make informed decisions about integrating FLPs into their estate planning efforts, potentially securing their financial legacy for generations to come.If you are considering adding an FLP to your estate plan, or if you need assistance resolving a dispute related to your family’s FLP, the experienced legal professionals at the Law Offices of Denise Eaton May, P.C., can help. We have decades of experience offering comprehensive estate planning services as well as professional mediation, so we are well-equipped to help you avoid or resolve disputes. Learn more about how we can assist you with your FLP concerns by scheduling your consultation today.
