Family Limited Partnership: Any Disadvantages?

A family limited partnership is frequently the choice of forward-thinking, successful parents who recognize the need to protect their assets and provide for the generations that follow.  Consider the story of Gene and his wife, Charlotte, who own several prosperous restaurants in Port St. Lucie, Stuart,  and Palm City, Florida. As they begin their annual estate plan review, they re-examine their goals. 

Gene and Charlotte have two children. Their son, Grayson, helps manage the restaurants. However,  their daughter Courtney lives and works out of state. Gene and Charlotte want to make sure both their children and their grandchildren benefit from their success. 

Luckily, Gene and Charlotte have many estate planning tools at their disposal. They know they want to take advantage of some tax benefits. They also want their family to maintain control over their assets like their investment portfolio and their family business. They know there are advantages and disadvantages to all of the options at their disposal.

What is a Family Limited Partnership?

A family limited partnership, or FLP, is a limited partnership created to manage a family’s business assets.

The partnership consists of a general partner and at least one limited partner. General partners and limited partners must be family members. 

The IRS definition of family includes: any spouse, ancestors, children, grandchildren, great grandchildren, and spouses of children, grandchildren, and great grandchildren.

Disadvantages of Family Limited Partnerships

There are disadvantages to using a family limited partnership:

• Liability. The general partner of the family limited partnership shoulders the liability for claims and judgments against the partnership. This helps the limited partners, of course, but could make the general partner’s personal property vulnerable. Other asset protection strategies might be better, although these concerns could be alleviated by naming or creating an entity to act as general partner rather than having an individual act as such.
• Taxes. For a family limited partnership, taxes can be very complicated. You have to be careful to keep personal business and family limited partnership business separate to withstand IRS scrutiny. Also, capital gains taxes may become an issue.
• Minors. All of the partners must be at least age 18. If minors are given limited partnership status, a parent or guardian would need to control their interest. Other options may be better for families interested in transferring wealth to younger generations. Gene and Charlotte have two minor grandchildren, one adult grandchild, and one minor grandchild with special needs. They may choose to gift limited partnership to trusts held on behalf of the minor grandchildren but make the adult grandchild a limited partner.
• Different Goals. It may seem like a good idea to leave a business to your children equally. However, they may have different, conflicting goals. For example, Grayson plans to work in the family business for the rest of his life. Courtney has no interest in the business at all. Courtney may want to sell her share or may disagree with Grayson’s management of the business after their parents retire. A family limited partnership may not protect the business from their disagreements.
• Establishing a family limited partnership, or managing one incorrectly, may cause more harm than good to your family business.

Family Limited Partnership vs Trust

Both Family Limited Partnerships and trusts are meant to transfer wealth efficiently. FLPs are meant to organize a business’s ownership. A trust is a fiduciary agreement in which a third party holds assets on behalf of the beneficiaries designated by the creator of the trust. Trusts encompass a wide range of forms and serve various purposes that go beyond the scope of solely family business matters.

Law Offices of John Mangan, P.A.     Palm City – Stuart, FL

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