Las Vegas Family Limited Partnership (FLiP)
Southern Nevada Estate Planning and Probate Lawyer
At Cassady Law Offices, we work exclusively in estate planning, probate and financial services matters. Our Las Vegas estate planning attorney helps families throughout Clark County who want to prepare the estate and make effective plans for their financial future. In addition to routine wills and trusts we offer advanced estate planning options.
To discuss your estate and financial needs in a free initial consultation, contact our Southern Nevada estate planning lawyer. For basic information on Family Limited Partnerships (FLiPs), please consider the information below.
Family Limited Partnership (FLiP)
Q: What is a Family Limited Partnership?
A: A Family Limited Partnership (also called a FLP or “FLiP”) is an entity organized as a limited partnership under state law. It is called a “Family” Limited Partnership because the partners are typically family members or others whom the organizers of the FLiP wish to be the beneficiaries of their estate plan or gifting program.
A Limited Partnership is simply an agreement between the partners. There is a general partner, as well as the limited partners. There can be more than one general partner, such as a husband and wife, who can both be general partners of the same FLiP. The rights and responsibilities of the general and limited partners are spelled out in a partnership agreement.
Q: Do I have to give up control of my assets with a FLiP?
A: No. In a limited partnership, the general partner is responsible for the day-to-day business of the partnership. As the general partner, you will retain full control of the partnership assets, pursuant to the Partnership Agreement.
Q: What are the benefits of a Family Limited Partnership?
A: The main advantages of forming and funding a FLiP involve estate and gift tax savings and asset protection. As discussed above, the FLiP also allows you to retain control over the transferred assets while enjoying these advantages.
Upon forming the FLiP, you will transfer assets so that the FLiP becomes the owner of those assets. You are then able to make gifts of limited partnership interests to your children or other heirs. This accomplishes several different estate planning objectives simultaneously.
First, the value of each limited partnership interest which you give away decreases the value of your taxable estate and, consequently, any tax which your heirs would have to pay to the government upon your death. The gifts are made using the annual gift tax exclusion, so you do not have to pay any gift tax on the transfer.
Second, the value of the partnership interests you are transferring is far less than the corresponding value of the assets in the partnership. Since limited partners do not have the ability to direct or control the day-to-day operation of the partnership, a minority discount can be applied to reduce the value of the limited partnership interests which you are gifting. Further, because the partnership is closely-held and not publicly-traded, a discount can be applied based upon the lack of marketability of the limited partnership interest. This allows you to leverage the FLiP as a vehicle to transfer more wealth to your heirs faster, while retaining control of the underlying assets.
Q: How are these minority and marketability discounts justified?
A: As always, it is important to document and support any information you provide to the IRS. This is especially true when dealing with gift and estate taxation, as these areas are closely scrutinized for attempts to cut corners or use abusive techniques to evade the transfer taxes. It is important to have a qualified appraiser value the partnership and the limited partnership interests which you are giving to your heirs. The appraiser will apply the appropriate discounts and have the expertise and support to defend against any inquiries IRS may try to pursue.
Q: What are the disadvantages to using a Family Limited Partnership?
A: The main disadvantage to using a FLiP as an estate tax planning technique is that IRS is aware of how effective these structures are. IRS has tried, unsuccessfully to date, to argue that FLiPs are transparent entities which should be ignored for transfer tax purposes. They have experimented with several creative arguments, but have yet to find one which has consistently proven to defeat the FLiP as a useful and effective estate tax planning vehicle.
That is not to say that all FLiPs are unassailable. A FLiP holding several pieces of residential real estate as rental properties is much more likely to successfully pass muster than a FLiP holding nothing more than a brokerage account containing publicly-traded securities. Each situation is different, which is why it is important for you to have a knowledgeable team of advisors, such as an accountant, attorney, and financial planner to assure you are making the decisions which best achieve your own personal goals.
To learn more about Family Limited Partnerships, living trusts, and other estate planning options, contact our Las Vegas estate planning attorney.
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