| |
The-family-limited-partnership
By John-Fraker
Warning! The following Estate Planning technique is extremely technical and should not be attempted without competent legal representation.
The following discussion is for informational purposes only.
The Family Limited Partnership (FLP) is a sophisticated family business planning entity. When structured properly, it allows for the senior generation (the parents) to maintain substantial control over the assets of the Partnership during their life.
Upon their death, it is possible to transfer those assets to the junior generation, while enjoying substantial discounts on the value of the property transferred.
How does all this Work?
The Family Limited Partnership is comprised of two parties: the general partners, and the limited partners.
The General Partners are usually the members of the senior generation, or a business entity - such as a corporation or limited liability company - may be used for this purpose. As in a regular limited partnership, the general partners are involved in the day-to-day management of the FLP, and retain personal liability.
The Limited Partners are the members of the junior generation - the children of the senior generation. They retain an economic interest, although not a management interest, in the business of the FLP.
The General Partners will transfer their assets - including real estate, securities, and ongoing business concerns - to the FLP, and then transfer the Limited Partnership shares to the junior generation. Gift taxes may be owed for the value of the property transferred, however significant discounts may be available to soften this blow.
When is a Dollar Not a Dollar?
The key economic benefit of an FLP is the valuation discounts that may apply to assets contributed to an FLP.
There are four main discount theories which may apply:
(1) Lack of Marketability - since FLP shares are not freely traded on the open market, the lack of marketability theory says that they should not have the same value as if the underlying assets (the or real property) were held free and clear of restrictions.
(2) Built-in Capital Gains - Often the or real property that are transferred to the FLP - and by extension to the Limited Partners - have a low cost basis, and a high built-in capital gain. Since the recipient of such investments are obligated to pay the taxes upon their sale - they are not worth as much as if no taxes needed to be paid.
(3) Lack of Control - since a Limited Partner, by definition, does not have management control over the company, his interest in the company is not as valuable as a partner who did have such control.
(4) Fractional Share Discount - with regards to real property, an owner of a fractional share of property has a
Refinance As Low As 5.48% - Sponsored Link
Ad - www.HomeLoanTrust.com Nov 19 2008 2:17AM GMT
Shuffle Master VP under investigation by SEC
Rolling Good Times Nov 19 2008 2:17AM GMT
Russia's MICEX, RTS suspend stock trading as prices plummet
PRIME-TASS Nov 19 2008 2:11AM GMT
Russia's RTS suspends stock trading until Tue amid sell-off
PRIME-TASS Nov 19 2008 2:10AM GMT
SEC accuses former BMO trader of inflating bank's trading portfolio
Sun FM Nov 19 2008 2:06AM GMT
SEC accuses former BMO trader of inflating ba...
Canadian Business Magazine Nov 19 2008 2:06AM GMT
Investment firm pressures TomoTherapy about stock price
TradingMarkets Nov 19 2008 1:58AM GMT
Instinet Strengthens Asia-Pacific Business With New Management Structure, Key Hires
Mondo Visione Nov 19 2008 1:13AM GMT
SEC Charges Banker And Brokerage Executives With Multi-Million Dollar Financial Fraud - Trader At Bank Of Montreal Colluded With Brokerage Firm To Overvalue Bank's Portfolio By Hundreds Of Millions Of Dollars
Mondo Visione Nov 19 2008 1:06AM GMT
BPS & Nomura to Lead GRC Workshop at GARP Asia Pacific Convention
Globe Investor Nov 19 2008 1:03AM GMT
BPS & Nomura to Lead GRC Workshop at GARP Asia Pacific Convention
Street Insider Nov 19 2008 12:45AM GMT
Instinet Strengthens Asia-Pacific Business with New Management Structure, Key Hires
Street Insider Nov 19 2008 12:44AM GMT
BPS & Nomura to Lead GRC Workshop at GARP Asia Pacific Convention
MarketWatch Nov 19 2008 12:38AM GMT
Soros-Funded Idea Factory Becomes Obama Policy Front
BKInformation.com Nov 19 2008 12:20AM GMT
Thomas Properties wants the rest of its loan from Lehman for Austin deal
BKInformation.com Nov 19 2008 12:16AM GMT
KfW posts 1.8-billion loss related to IKB, Lehman
BKInformation.com Nov 19 2008 12:16AM GMT
Instinet Strengthens Asia-Pacific Business with New Management Structure, Key Hires
MarketWatch Nov 19 2008 12:08AM GMT
Fitch Takes Various Actions on 1 Bear Stearns Resecuritization Transaction
SmartBrief Nov 19 2008 12:07AM GMT
IMF package fails to stimulate stock trading
DAWN Group Nov 18 2008 11:55PM GMT
SEC accuses former BMO trader of inflating bank's trading portfolio
Canadian Business Magazine Nov 18 2008 11:51PM GMT
SEC charges former Bank of Montreal trader, ex-Optionable CEO
SNL Securities Nov 18 2008 11:42PM GMT
Fired Morgan Stanley Manager Sues For Age Bias
Law360 Nov 18 2008 11:42PM GMT
REFILE-BRIEF-TD Ameritrade reports October metrics
CNBC Nov 18 2008 11:41PM GMT
BP, Soros Fund invest in ethanol-making microbe
CNET News.com Nov 18 2008 10:46PM GMT
REFILE-BRIEF-TD Ameritrade reports October metrics
Interactive Investor International Nov 18 2008 10:35PM GMT
Bogle Views Paulson as Another Investment Banker
New York Times Nov 18 2008 10:34PM GMT
Discovery Labs to Present At the Lazard Healthcare Conference
Interest!ALERT Nov 18 2008 10:33PM GMT
Morgan Stanley's Banking Chief Crossing the Line
Bank Technology News Nov 18 2008 10:20PM GMT
Schwab Re-Org Combines RIAs With Retirement Biz
Registered Rep Nov 18 2008 10:13PM GMT
DemandTec to Present at the Credit Suisse 2008 Annual Technology Conference
SmartBrief Nov 18 2008 10:08PM GMT
US Sen Collins Pushes For CDS, Investment Bank Regulation
Morningstar.com Nov 18 2008 10:06PM GMT
less valuable interest than an owner who owned an undivided interest in that property.
Unfortunately, the discounts offered by these theories are not cumulative. All four discounts, taken together, may offer valuation discounts in the 25-33% area, depending on the underlying assets in the FLP.
The more unique and difficult to value the assets, the greater the discount. Therefore, timberland property subject to State law that limits quantities of timber that can be harvested annually will result in a greater discount than publicly traded securities, which have a readily ascertainable value.
Proceed with Caution
Needless to say, telling the IRS that a dollar is not really a dollar when it is contributed to an FLP is extremely controversial. Inattention to detail, inadequate valuation techniques, or inappropriately large valuation discounts will almost surely trigger an audit from the IRS.
Consultation with qualified legal counsel is indispensable. It almost always makes sense to request an advance ruling or administrative guidance from the Internal Revenue Service, before assets are contributed to an FLP.
Copyright (c) 2007 John Fraker Article Source: http://activeauthors.com About the AuthorJohn Erik Fraker, attorney and founding partner in the Law Firm of Ainer and Fraker, LLP, is committed to helping people fulfill their estate planning goals through education, research, and implementation. Mr. Fraker is a graduate of the University of California at Berkeley and of the University of Southern California Gould School of Law (J.D.). For additional information, visit www.estatesattorney.com
| |
