Family Limited Partnerships (FLPs) are a popular estate planning tool for wealthy families. They allow family members to pool their resources together and invest in various assets such as stocks, bonds, and real estate. FLPs offer several tax benefits, but there are also complex tax rules that must be followed. In this blog post, we will provide an overview of the US taxation of Family Limited Partnerships (FLPs).

What is a Family Limited Partnership?

A Family Limited Partnership is a type of limited partnership in which family members own the majority of the partnership interests. The general partner manages the partnership and has control over its assets, while the limited partners are passive investors. FLPs are commonly used as an estate planning tool to transfer wealth to future generations while minimizing estate taxes. They can also provide asset protection and limited liability for the partners.

Tax Benefits of FLPs

One of the primary tax benefits of FLPs is the ability to transfer assets to future generations at a discounted value. The limited partners of an FLP typically do not have control over the partnership assets and therefore their partnership interests are valued at a lower rate than if they owned the assets outright. This discounted value can result in significant estate tax savings.

FLPs also offer flexibility in terms of taxation. They are generally treated as pass-through entities for tax purposes, meaning that the partnership itself does not pay taxes. Instead, the partnership’s income, deductions, and credits flow through to the partners and are reported on their individual tax returns. This can be beneficial because the partners can offset the partnership’s income with their own losses and deductions.

Tax Rules for FLPs

While FLPs offer several tax benefits, there are also complex tax rules that must be followed. One of the most important rules is the “family attribution” rule. This rule treats all family members as a single entity for tax purposes, meaning that the transfer of assets between family members is subject to gift tax rules. Additionally, any income earned by the partnership is allocated to the partners based on their ownership percentage.

Another important tax rule for FLPs is the “substantial economic effect” requirement. This requirement ensures that the allocation of partnership income and losses is done in a way that reflects the actual economic arrangement of the partners. If the allocation of income and losses is not done in a way that meets this requirement, the partnership may be subject to additional taxes and penalties.

Conclusion

Family Limited Partnerships are a popular estate planning tool that offer several tax benefits. They can be used to transfer wealth to future generations while minimizing estate taxes, provide asset protection, and offer flexibility in terms of taxation. However, there are also complex tax rules that must be followed to ensure that the partnership is properly structured and taxed. It is important to consult with a tax professional before creating an FLP to ensure that it is set up correctly and that all tax rules are being followed.