People don’t build businesses intending for them to fail. They build them to succeed, grow, and provide for their families. The more they succeed, the greater the risk of liabilities, including estate taxes, to the heirs of the business owners.
If you own a family business, real estate investments, privately traded or publicly held securities, or other business assets, you might view them as separate from the personal assets you have placed in an estate plan. Although they are not personal assets, you nonetheless need to account for them on behalf of the beneficiaries of your estate. A family limited partnership may be the best way to do that.
At the Law Offices of Jerry J Goldstein, we work with business law clients throughout the Coachella Valley including Palm Desert, California, as well as communities in and around Imperial, Los Angeles, Orange, Riverside, San Bernardino, and San Diego counties, among others. We can help you understand the benefits of a family limited partnership.
How Do Family Limited Partnerships Work?
A family limited partnership is a holding company designed to retain the family business and other assets. It is formed by one or two family members who manage, control, and distribute the partnership’s assets while protecting them from creditors and reducing estate and gift tax burdens for heirs.
There are general and limited partnership interests. The general partners are the creators of the family limited partnership. They manage and control the assets and as such, bear liability for the entity. The general partners would typically be the parents of the heirs.
Limited partners are typically the children or grandchildren of the partnership creators. They have no control over the partnership’s management, investments, or distribution of assets and as such, are protected from liability the family business and assets in the partnership may be exposed to. Of course, they do have an economic interest in the partnership.
The Advantages of a Family Limited Partnership
There are some distinct advantages to creating a family limited partnership as part of your estate plan:
Taxation benefits can be significant. A family limited partnership can substantially or completely shelter heirs from federal estate tax. This is particularly beneficial when the value of the partnership’s assets is much higher upon the death of the general partners than they were when those assets were placed in the partnership. Estate taxes would be based on the value of the asset at the time the partnership was formed, not on the value paid to the limited partners as part of the estate. Moreover, the general partners can use a family limited partnership to begin the distribution of wealth as gifts to their heirs during their lifetime.
A family limited partnership not only allows the general partners to create the agreement regarding the distribution of assets or restrictions, but to revise the agreement as circumstances change. For example, if the spouse of a child is a limited partner, the general partners could omit that partnership should the couple divorce. This latitude is not afforded under, for example, a family trust.
As limited partners, assets from the family limited partnership are largely protected from creditors. In most cases, only the general partners can decide whether to use the assets of the partnership to pay the creditors of a limited partner. If crafted correctly, the family limited partnership may even protect a limited partner’s assets in the partnership in bankruptcy.
A family limited partnership usually provides protections that other estate planning tools, such as trusts and family limited liability companies, cannot provide.
Are There Disadvantages To A Family Limited Partnership?
Unlike a living trust, for example, personal assets cannot be placed in a family limited partnership. Only business assets can be. Furthermore, although you may associate a family limited partnership only with estate planning, it’s nonetheless a business. Businesses must be managed with competence, so the general partners need to possess the proper skills to do so.
How the Law Offices of Jerry J Goldstein Can Help
Family limited partnerships require special legal counsel to create one that maximizes the potential benefits of having one. At the Law Offices of Jerry J Goldstein, our attorney practices business law, so we understand the business features of a family limited partnership as well as the estate planning benefits. Business is business, so work with a business attorney. However, family is family—so work with an attorney who understands your desire to benefit your heirs with your business success.
Take advantage of our experience with family limited partnerships. Call the Law Offices of Jerry J Goldstein in Palm Desert, California to schedule a time to discuss them with you. Please note that in providing services outside of our immediate area we generally don’t bill for travel time from our offices to meet at the business location or home of our clients.