Family Limited Partnership: Any Disadvantages?
Gene and his wife, Charlotte, own several prosperous restaurants in Port St. Lucie and Palm City, Florida. As they begin their annual estate plan review, they re-examine their goals. Their son, Grayson, helps manage the restaurants, but their daughter, Courtney, lives and works in Nevada. Gene and Charlotte want to make sure both their children and their grandchildren benefit from their success. They consult with their attorney about the possibility of establishing a family limited partnership.
Keeping it in the 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. All of the partners, whether general or limited, 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.
Family Limited Partnerships: Not Always the Best Choice
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.
- 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.
Consult with an Experienced Estate Planning Attorney.
At the Law Offices of John Mangan, P.A., we help clients develop plans that achieve their estate planning goals. Please contact us at 772-324-9050 to schedule an appointment or fill out our Contact Form. From our office in Palm City, Florida, we also serve clients in surrounding communities like Stuart, Hobe Sound, Port St. Lucie, and Jupiter.