A family limited partnership is a type of legal agreement that combines a family’s assets into a single entity. Each family member can then receive shares in the partnership, according to the wishes of the person setting up the trust. Family limited partnerships are often used if there is a family business that will need to be divided upon the death of the founder or founders. They are also used as a way to minimize the inheritance tax when passing a business or other assets to the next or subsequent generations.
Various types of assets can be held in a family limited partnership. In addition to a business, such partnerships can hold real estate, investments, and just about any other type of asset. A family limited partnership, sometimes called a limited family partnership, can make it a lot easier to divide illiquid assets. It prevents a family from having to sell assets like a business if some of the heirs want to retain the business and others do not.
Unlike a trust, shares of a family limited partnership are owned by the family members. Shares in the trust can be gifted to the children and grandchildren over time. If these shares are given within the confines of the gift tax law, the family limited partnership becomes a very effective way to reduce the estate tax burden at the time of death.
If a business owner establishes a family limited partnership, it may contain the business as well as other assets he owns. The trust may have general partners and limited partners. General partners can control the assets in the trust, and buy and sell shares of the trust. Limited partners cannot. The business owner can give shares of the trust to his children over time. The fair market value of the trust shares is used when determining whether the shares are subject to gift tax. Since the shares are illiquid, their fair market value may be less than the aggregate value of the assets in the trust, which results in a tax advantage for the recipients of the share.
Establishing a family limited partnership enables people who have significant assets to arrange those assets so that they are easily transferred to their heirs. The trust can be set up in such a way that control of the assets does not pass to the next generation until the person who established the trust dies. This gives family limited partnerships a degree of control that is not found in other estate planning vehicles such as irrevocable trusts.