Protect, Provide & Profit - A Family Limited Partnership
A Family Limited Partnership is becoming one of the most popular methods to pass the equity in a larger estate to the heirs at a discounted tax rate, while retaining control, and at the same time, protecting the assets from lawsuits.
This entity may be used to begin shifting ownership from your estate to your heirs without losing control.
The Limited Partnership is becoming a more popular staple of estate planning for a number of reasons.
A major one is for asset protection.
It enables a parent or grandparent to divert income from partnership assets to children and grandchildren in lower tax brackets.
It allows gifting of limited partnership interests to reduce the size of your estate without placing cash or property directly in the control of the donees.
You retain control over the use and nature of the assets in the Family Limited Partnership.
Limited partnership interests are also easily divided to enable you to meet the annual exclusion limits.
This helps reduce the size of the taxable estate without giving up control.
The general partner ceases to have any rights to vote or control the partnership upon death.
For this and other reasons, partnership interests are subject to various valuation discounts at death that help minimize the size of the estate for estate tax purposes.
It provides a degree of lawsuit protection.
Certain characteristics of the partnership ownership form make it attractive as a means of safeguarding your assets.
Safeguarding Assets Here's how it works: Partners hold the partnership property in a special formC, a tenancy in partnership.
Partnership assets are not subject to the debts of either the general or the limited partners.
If a creditor gets a judgment against one of the partners, the creditor applies for a "charging order" to enforce his judgment.
This is an order by the court charging the partnership interest of the debtor partner.
This means that if the partnership pays any income to the partner, it now must be paid to the judgment creditor.
The creditor does not become a partner of the partnership, but is entitled to receive any distributions which would be given to the debtor partner.
Now, here's the fun part.
The General Partner of a Family Limited Partnership can choose to distribute the partnership income, or to accumulate such income and reinvest it in the Partnership.
But he must still issue a "K-1" (a tax report) showing each partner's share, and tax liability.
So, if general partner decides not to make a distribution of income, the creditor only gets the "K-1".
He will now have to pay the taxes on the income that was never really distributed.
So, transferring assets into a limited partnership is an excellent way to safeguard your property.
Advantages: -Asset protection-Estate equity gifting at discounted rates-Some income tax splitting.
Disadvantages: -Additional income tax return required-Must have business purpose-Costly to establish.
This entity may be used to begin shifting ownership from your estate to your heirs without losing control.
The Limited Partnership is becoming a more popular staple of estate planning for a number of reasons.
A major one is for asset protection.
You retain control over the use and nature of the assets in the Family Limited Partnership.
This helps reduce the size of the taxable estate without giving up control.
For this and other reasons, partnership interests are subject to various valuation discounts at death that help minimize the size of the estate for estate tax purposes.
Certain characteristics of the partnership ownership form make it attractive as a means of safeguarding your assets.
Partnership assets are not subject to the debts of either the general or the limited partners.
If a creditor gets a judgment against one of the partners, the creditor applies for a "charging order" to enforce his judgment.
This is an order by the court charging the partnership interest of the debtor partner.
This means that if the partnership pays any income to the partner, it now must be paid to the judgment creditor.
The creditor does not become a partner of the partnership, but is entitled to receive any distributions which would be given to the debtor partner.
Now, here's the fun part.
The General Partner of a Family Limited Partnership can choose to distribute the partnership income, or to accumulate such income and reinvest it in the Partnership.
But he must still issue a "K-1" (a tax report) showing each partner's share, and tax liability.
So, if general partner decides not to make a distribution of income, the creditor only gets the "K-1".
He will now have to pay the taxes on the income that was never really distributed.
So, transferring assets into a limited partnership is an excellent way to safeguard your property.
Advantages: -Asset protection-Estate equity gifting at discounted rates-Some income tax splitting.
Disadvantages: -Additional income tax return required-Must have business purpose-Costly to establish.
