One of the benefits of having a family limited partnership is that it allows you to keep your assets within the family.
But did you know a properly executed family limited partnership can also earn you tax savings every year? A good attorney can also help you understand how the processes of ‘fractionalizing’ and ‘discounting’ can maximize your death tax-saving benefits.
What is a family limited partnership?
A written agreement giving details of responsibilities, rights and duties of each partner is drawn up as part of a family limited partnership. You may have both general partners with greater control than limited partners.
The main legal benefits of a family limited partnership are:
a) An easier distribution of the assets according to the desires of the sole owner, who is the head of the family.
b) A tax discount on the transfer of assets from one partner to another and on gifts between the partners. This is also known as ‘fractionalizing’.
What is ‘fractionalizing’?
‘Fractionalizing’ refers to distribution of assets that cannot be divided physically like an apartment. For example, a couple owns an apartment building worth $5 million and have three children. With the help of an attorney, they create a family limited partnership with themselves being general partners and the three children being limited partners.
Their attorney helps them use a quit-claim deed to transfer the apartment building to the family limited partnership (FLP). The general partners agree that the FLP will have 10 units with each a value of half-a-million dollars totaling to $5 million. The parents can now give these ‘units’ as they wish to their children. This is called ‘fractionalizing’.
This makes it fairly easy to distribute the assets within the family. Another benefit of the FLP is that income can be shifted to partners who are in the lower tax bracket.
A good estate planning attorney can help you understand other aspects of a family limited partnership like creditors, limited powers, general partner duties and annual gifts to help in tax savings.