If you and your family are running a business or have significant investments, and you’re looking for a way to organize, protect, and streamline your family interests, then one of the better options is a Family Limited Partnership, or ‘FLP’ for short.
By the end of this article, you should have a much better understanding of FLPs and can make more informed future decisions about your family’s wealth planning and wealth management needs.
What Are Family Limited Partnerships?
High-net-worth individuals who have worked hard and been fortunate enough to create significant holdings would want to ensure their entire family’s finances are sorted and well-protected. There is where setting up an FLP can be beneficial to retain various holdings and interests.
You can include real estate, public securities, private company shareholdings, and many other business interests in your FLP.
With such a wide ambit also comes protection, in the form of protecting all of these assets from creditors, and minimizing gift and estate taxes.
Before we discuss the benefits in more detail, we first need to understand the structure of an FLP.
An FLP would consist of partners, who would make up the family members including the parents, children, nieces and nephews, and grandchildren.
You would think having so many partners would make it difficult to control holdings under the FLP. However, an FLP allows for two different classes of partners.
The first are general partners who are responsible for the management, control, and decision-making of the FLP. Usually, these would be the parents or grandparents of the family, who have been the ones to build the family’s wealth.
The remaining family members can be limited partners, which means they will have an economic interest in their holding but will have no control or decision-making power.
Normally, limited partners are also not given the right to sell or mortgage their share, which further ensures there is no risk to the holding no matter how many partners (i.e. children, nephews, nieces, or grandchildren) there might be.
Benefits of Family Limited Partnerships
Family Limited Partnerships offer several benefits to those looking to manage their wealth effectively. The three main advantages are taxation, control, and protection.
First and foremost, you should know that FLPs enjoy an annual gift tax exclusion, so that’s one less thing you have to worry about. Moreover, future returns are also exempted in a way, as they are deemed an asset belonging to the FLP rather than a personal asset of any partner.
This means that if you placed an asset into your FLP today that is valued at $500,000, the valuation for tax purposes will remain at $500,000 at the time of your death, even if the asset’s actual market value is $5,000,000 at that time. The difference in this value belongs to the partners of the FLP.
As you can see, from a tax perspective there is a great deal of benefit to be enjoyed.
Practically No Loss of Control
FLP structures allow for parents or grandparents (whoever the founders of the family wealth are) to retain control over the decision-making and control of the FLP and the assets under its holding.
A key constitutional document of an FLP is the Family Limited Partnership Agreement, which can be as detailed as the founder general partners want it to be.
An agreement can outline the level of control that can be exercised by the general partners and have contingencies to protect against loss of control.
These limitations can go so far as to account for any changing circumstances in the personal lives of family members, such as divorce or the untimely and sudden death of a family member. You can also limit or explicitly forbid any limited partners from selling or mortgaging their shareholding in the FLP.
Protection From Creditors
Limited partners (and by extension your assets under the FLP) are also protected from creditors to a certain degree.
Without the consent of the general partners, there’s no way really that creditors could gain control or ownership of the interests of limited partners. Also, creditors cannot compel an FLP to make cash distributions on behalf of limited partners, which means the assets you have worked so hard to build are protected.
Disadvantages of Family Limited Partnerships
It’s a Proper Business
At the end of the day, an FLP is an actual registered business and you need to make sure that it’s run like one. This means meeting compliance requirements and necessitates that the general partners be competent to run the FLP as you would any registered business.
General Partners Can Be Liable To Creditors
While limited partners are offered protection from creditors, the same can’t be said about the general partners. The general partners’ creditors may have a rightful claim over the assets of an FLP, a share in the FLP itself, or payments to be made by the FLP.
There is no doubt that Family Limited Partnerships have many advantages, but you must be sure that you have the competence and time to run it like a properly registered business.
You also need to ensure that you manage your affairs in a manner to keep creditors happy and as far away as possible, as you (and the FLP) in your capacity as a general partner are liable to creditors.
Considering the above, it might be prudent to speak to a financial expert so you have a clear idea of all the tax and legal compliances involved in creating a family-limited partnership, as well as specifics of how to set up an FLP.
Financial consultants in Halifax are quite well-versed with these specifics and can offer valuable advice and insights not just into FLPs but also trusts, estate planning, and other investments.