A Family Limited Partnership in Action

A family limited partnership is a type of arrangement that is commonly used in estate planning. This type of tool is a partnership that can be used among family members in order to transfer assets. Here are the basics of the family limited partnership and how it can work.

Family Limited Partnership

With a family limited partnership, members of a family can own shares in the group partnership. Family members and put assets into the partnership and everyone can own a portion of those assets depending on how many shares they have. This tool is often used in order to convey large estates to younger family members without having to pay as much in estate taxes. This has become a popular tool for many people to use because it allows them to get out of losing a large portion of the estate to taxes.

How it Works

Let's say that a wealthy businessman wanted to set up a family limited partnership. The businessman has a wife and 2 children that he wants to include in the partnership. To start out the partnership, he provides each member of the partnership with a certain amount of stock. If he does it correctly, you can provide them with just enough stock so that they stay within the annual gift tax requirements set forth by the IRS. 

Every year, the businessman gives the other family members some additional shares of stock. Each year, he is careful to give them enough stock so that they can be under the annual gift tax requirements. As long as they stay below that value, they do not have to pay any gift taxes on the transfer. The businessman continues to transfer shares in the partnership to his kids over the years. After several years of doing this, the children are the majority owners in the partnership. 

Benefits

Doing things this way can provide the family with several benefits. First of all, the businessman gets to convey ownership of his assets and the business to his children. Since he did it within the gift tax requirements, he is not going to have to pay any taxes on the amount of money or stock that is transferred to his children. The children benefit because they can receive a portion of ownership in the assets of the estate.

Doing things this way makes it convenient because everyone in the family can still use the assets. As long as you are a partial owner in the partnership, you are going to have access to all of the assets that are held in it. Even though the children are now the majority owners of the estate, the parents still have free access to everything within the partnership. 

When the parents pass away, the rest of the ownership in the assets can be transferred to the children. At that point, as long as the assets are below the estate tax exemption, the transfer will not be subject to estate taxes. 

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