What is a Texas Family Limited Partnership?
A “family limited partnership” (FLP) is simply a limited partnership in which all or substantially all of the partners are family members. Family limited partnerships are commonly used to achieve a variety of business and tax objectives.
Family limited partnerships must be formed for a valid “business” purpose and not just to avoid estate and/or gift taxes. There are several “businesses purposes” for which a family limited partnership can be formed i.e. real estate, investments, or a family business.
The nature of a limited partnership is that the management is consolidated in a general partner(s). Limited partners may not participate in management. Therefore, a family limited partnership allows the general partner to control the partnership and its assets. This effectively is a transferring of indirect ownership of portions of the assets to second and third generation family members who are limited partners. Additionally, the general partner has power to control distributions e.g. cash flow of the partnership. For example, the general partner could choose to invest in new investments or reinvest in a family business or other investments the family already holds.
Benefits of a Texas Family Limited Partnership
Transferring limited partnership interests to family members reduces the taxable estate of senior family members. Transferring the value of the asset to the FLP allows you to remove it from your estate for tax purposes. Additionally, you can transfer the value of the asset to your children while maintaining control over the decisions and distributions of the investment. Furthermore, the limited partners cannot control investments or distributions, so they may be eligible for valuation discounts at the time of transfer.
Transfers of limited partnership interests are also eligible for the annual gift tax exclusion; a great way to reduce income and/or estate and gift taxes.
Worried about divorce? An FLP protects assets from claims of future creditors and/or ex-spouses. Creditors may not force cash distributions, vote, or own the interest of a limited partner without the consent of the general partners. If there is a divorce, and a limited partner ceases to be a family member, the partnership documents can require a transfer back to the family for fair market value, keeping the asset in the family.
An FLP can be a great estate planning tool for many families. But remember, every family is different and the family goals should be discussed with an estate planning attorney to make sure you’re taking advantage of everything the law allows.