How Family Limited Partnerships Can Help With Estate Planning In New York

Estate planning involves a wide variety of aspects, including wills, trusts, advance healthcare directives and other crucial considerations. If you own a family business, estate planning can be even more complicated. You want your business and its assets to transfer smoothly to your next of kin, but without proper planning the IRS may consider the succession of your business to be newfound income for your child, and subject them to gift taxes and other ramifications.

One way to avoid this problematic outcome is to create a Family Limited Partnership (FLP). FLPs are a legal creation that can preserve a family business for heirs while also shielding assets and reducing gift and estate taxes. FLPs are commonly used as part of business succession planning, business continuity plans, and overall estate plans. The higher the value of the business and the owner’s net worth, the more important these plans become.

Family Limited Partnerships follow a few general guidelines. Through a Family Limited Partnership, you create and fund the entity and act as its general partner. At least one other family member will serve as a limited partner. This allows assets to be transferred upon death of a general partner to the limited partners within the entity. Since your ultimate goal is to transfer assets to your family in the most efficient manner, the FLP can help achieve this purpose while also complying with Federal and State laws and the IRS.

Unlike some trusts and other estate planning instruments, a Family Limited Partnership can reduce the tax burden for your beneficiaries while allowing you to control the underlying assets during your lifetime. The Family Limited Partnership can also provide asset protection from creditors, and allow more management flexibility than possible from a trust.

General partners will own most shares of the business and will manage and operate the company. This includes oversight of financial transactions and investments. Limited partners within a FLP don’t typically hold management duties but will own some shares of the FLP. They may be entitled to dividends and interest from the business during its operation.

How to Commence a Family Limited Partnership in New York

Generally, to start the process, two or more family members may complete a partnership agreement, which will include the name of the Family Limited Partnership, and identification of general partners and limited partners. This agreement may also include various stipulations or bylaws for operation of the partnership. For example, the governing papers can provide that assets of the entity shall pass to a limited partner or partners in the event of the general partner’s death. Under this scenario, the general partner essentially gifts the assets tied up within the FLP entity, without subjecting the limited partner to gift and estate taxes.

Once the FLP is established, the general partner must file a Certificate of Limited Partnership with New York’s Department of State, then publish notice of the same in two newspapers designated by the county clerk.

At these early stages of formation, it is useful to consult with an attorney that is familiar with the process and has experience reviewing and filing Family Limited Partnership documents. Doing so can help you avoid scrutiny from the IRS, and potential legal headaches down the road.

Family Limited Partnerships must have some legitimate business purpose, and can’t be established simply as a tax-avoidance instrument. The entity must operate as a business, and revenue must continue to flow through the FLP under the general partner’s direction.

While there are a number of potential pitfalls, a successful Family Limited Partnership can protect your assets and ultimately serve your financial goals for your children and grandchildren.

Talk to a New York Estate Planning Attorney About Family Limited Partnerships Today

For many years, our attorneys have been helping individuals and families in all of New York City and Westchester County to protect their assets and plan for their family’s futures. If you’d like to know more about Family Limited Partnerships in New York, and how they may help you, call our Bronx office at 718-822-2203, or our New Rochelle office at 914-235-8500. You can also contact our Bronx & New Rochelle estate planning attorneys online and request a consultation in our office today.

Source:

irs.gov/pub/irs-soi/11pwcompench2cfam.pdf