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VOL. 127 | NO. 219 | Thursday, November 08, 2012

Dana and Ray Brandon

Consider a Family Limited Partnership

By Ray and Dana Brandon

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Ray’s Take A Family Limited Partnership (FLP) can not only be a good idea for reducing estate taxes, it can also bring a number of other advantages.

FLPs are primarily useful to those with extensive real estate investments or family-owned businesses to pass on to the next generation as opposed to stocks, bonds, and similar financial investments. Basically, it converts property interest ownership into partnership interest ownership.

Typically, the general partners (GP) in a FLP are the older generation. They manage the partnership like a holding company. The limited partners (LP) are usually the members of the generation who would inherit but, at least initially, have no direct control over assets in the FLP.

One of the primary advantages of an FLP is the ability to gift partnership interests to LPs while still maintaining full control of that interest. This can reduce the taxable estate of the senior/GP family members, plus the interest transferred to the donees can be discounted. Transfers from GP to LP within the partnership are also eligible for annual gift tax exclusion.

Beyond this, establishing an FLP can ease the transition of a business or other complex assets from experienced hands to the next generation. It not only enhances planning for management succession by allowing the GPs to retain control of assets to limit problems due to inexperience, it also helps to assure estate tax savings that could otherwise undermine continued ownership. Engaging the next generation in this more limited way initially can allow them an understanding of the management without full throttle responsibility.

FLPs are not for everyone, however. Beyond the necessary legal services, qualified appraisal services are required to determine the discount value of partnership interests. This makes FLPs more expensive than some other estate-planning tools. However, the advantage that comes from discounting the assets of an FLP – along with the transitional benefits – can make it well worth the cost. Ask your attorney or financial advisor to learn more.

Dana’s Take Family Limited Partnerships are usually used by immediate family members. As we all know, anytime you’re dealing with family, a host of emotional issues come to bear along with the financial ones.

In addition to evaluating the dollar costs associated with establishing and maintain a FLP. It’s important to consider relationship costs as well. Talk to every family member who will be included in a FLP to make sure they all thoroughly understand why this is advantageous.

Make sure an estate planner meets with all parties to answer questions. After that meeting, give the family time to discuss the options and bring up any further concerns or preferences.

To make a FLP a success both as a property management tool and as an estate-planning tool, clear and open communication between the generations is vital. Blood may be thicker than water, but the less spilled over family feuds the better.

Ray Brandon is a certified financial planner and CEO of Brandon Financial Planning (www.brandonplanning.com). His wife, Dana, has a bachelor’s degree in finance and is a licensed clinical social worker. Contact Ray Brandon at raybrandon@brandonplanning.com.

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