Estate taxes are costly. New York estate planning attorneys are often consulted for their expertise on how to limit estate taxes when people wish to transfer their wealth to their next of kin. In appropriate cases, this expertise may lead an estate lawyer to suggest the creation of a Family Limited Partnership.
Family limited partnerships exhibit many of the same characteristics of regular limited partnerships. For one, the control of the family limited partnership rests in the hands of one or more general partners. In the case of a family limited partnership, the general partners are typically the elders who possess the bulk of the personal assets: most often mothers and fathers, or sometimes grandparents. The family limited partnership also typically has a number of limited partners: the children or grandchildren of the general partners. The key difference between the general partners and the limited partners is control of the assets invested in the family limited partnership. General partners enjoy their proportional share of the assets plus control over how the assets are used, while limited partners only enjoy their proportional share of the assets without any control over how the assets are used.
In an estate planning context, the creation of a family limited partnership can be quite advantageous in terms of the tax burdens of the partners. Imagine a father and son scenario in which there are no other family members, such as a wife or sister. If the father wishes to transfer his assets to his son, the exchange would be subject to a gift tax. Essentially, the Internal Revenue Service wants to tax the son's newfound income.
By contrast, imagine the same scenario in a family limited partnership context wherein the father is the general partner and the son is the limited partner. If a family limited partnership is properly established, the father can establish for the son a percentage interest in the value of the partnership. As a limited partner, the son cannot cash in on his interest until the controlling general partner, his father, orders a distribution of the assets. Because the possessor of a non-controlling interest in a partnership cannot liquidate his interest for personal use, the interest has no fair market value. Thus, the Internal Revenue Service cannot tax the limited partner's interest.
The key advantage of the family limited partnership occurs at the death of the general partner. The entity's formation and governing papers can provide for the assets of the entity to pass to the limited partner in the event of the general partner's death. In this way, the father, at his death, has achieved what amounts to a gift in the amount of the assets tied up within the partnership entity.
A word of caution: family limited partnerships cannot be established for the sole purpose of devising assets to one's heirs. The entity must still operate as if it is a business. Business revenues and costs must flow through the entity, and the general partners must generally pay themselves salaries from the assets tied up in the entity. Purchases must be made through the entity for legitimate business purposes, or in furtherance of another business entity. For this reason, most family limited partnerships are "holding companies" for assets accumulated in other business ventures.
An experienced New York estate planning attorney can help you evaluate whether your estate plan may benefit from the creation of a family limited partnership. Your attorney can best explain the risks and rewards of such creation in light of federal law and of the laws of your jurisdiction.