The Power of Family Limited Partnerships

  • Wealth Preservation - The Internal Revenue Service now allows assets to be evaluated at a discount when owned by a Family Limited Partnership. This discount can substantially reduce a taxable estate, typically from 25 to 40%. This discount is known as an "illiquidity discount" and is authorized by Revenue Ruling 93-12.
  • Asset Protection - Creditors' rights to pursue assets owned by a Limited Partnership are severely limited, and in many instances a creditor will only be able to obtain a "charging order" against the right to future payments of a partner. The assets in the partnership are beyond the reach of the creditor, and the payment stream can often be altered or manipulated, resulting in by a preservation of assets.
  • Generational Planning - Because of the two-tiered structure of a limited partnership, with the general partner having complete control over the partnership, it is possible to transfer business interests without giving up control of a family business. This allows the younger generation to enter the business and to assume an equity position while retaining important control in the senior generation.
  • Estate Planning - Using a Family Limited Partnership allows an estate to equally distributed among a class of family members, without the need to liquidate or fractionalize an asset. This is especially useful where the estate assets are investment real estate or real estate used for family business purposes.

Understanding the Family Limited Partnership

  • Structure - A Family Limited Partnership is a partnership among family members, with two classes of partners. Most states, including New York, have adopted the Revised Uniform Limited Partnership Act, which governs Limited Partnerships.
  • The General Partner - Controls the partnership, with absolute authority to do any and all things in furtherance of the partnership business, including determination of distributions and the buying or selling of assets within the partnership.
  • The Limited Partner - Is the equity owner of the partnership, but has no voice in the control or operation of the partnership. Limited partners are entitled to a pro rata distribution from the partnership, but cannot be required to contribute additional cash or property.
  • Formation of the Partnership - The partnership is formed by all of the partners signing a limited partnership agreement. A Certificate is filed either in New York (or another state, in which case an application for authority to do business is filed in New York) and the assets are then transferred into the partnership. Thereafter, the partnership is under the control and direction of the general partner.
  • Taxation - The partnership is a separate taxpayer, although all income and expenses flow through the partnership to the partners pro rata to their ownership interest. Placing assets into the partnership is not a taxable event. Each year the partnership files a partnership return and reports income or losses to each partner on Form K-1.

Is a Family Limited Partnership Right For You?

  • Do you have a net worth in excess of One Million Dollars?
  • Is your estate subject to Federal Estate Tax?
  • Does you or your family own your own business?
  • Do you own commercial or investment real estate?
  • Are your assets at risk to large claims from potential creditors?
  • Are you considering significant estate planning or gift planning?

Our Family Limited Partnership Plan

  1. Certificate of Limited Partnership - This is the Certificate which forms the partnership in the jurisdiction selected.
  2. Application for Authority - If the partnership is formed in another state, an application for authority to do business in New York is filed with the Department of State.
  3. Partnership Agreement - This is the operational agreement between the partners, and deals with issues such as duration of the partnership, designation of the general partner, and the rights of the limited partners. Generally, the agreement will restrict transferability of ownership.
  4. Subscription Agreements - These are the formal documents where each partner subscribes to "purchase" shares in the partnership.
  5. Conveyancing Documents - These are the legal papers which transfer ownership from the individuals into the partnership.
  6. Tax Identification Number Application - It's your partnership's "Social Security" number.
  7. Minutes and Correspondence - Like a corporation, the partnership will have meetings and keep minutes.
  8. Partnership Summary/Glossary - Summary of the structure and contents of the Family Limited Partnership and a glossary of legal terms used in the documents.