Virginia Beach Family Limited Partnerships Attorneys
Helping Business Owners Protect Assets & Reduce Taxes
If you have a family business that you want to preserve for future generations, then you should consider establishing a Family Limited Partnership (FLP) to shelter assets and reduce overall gift and estate taxes. At TrustBuilders Law Group, we are committed to helping clients throughout Virginia Beach include FLPs as part of their business succession and continuity plans.
Married couples with business interests generally establish Family Limited Partnerships to shield their assets and grant limited-partnership interests to their children. Since the assets are removed from the general partners’ estates, they end up saving money on future estate taxes while the general partners retain control of the FLP and its assets. Limited partners can also receive distributions from the FLP, as well as tax benefits.
How Does An FLP Protect Assets?
In addition to ensuring your business is preserved for your family, another attractive feature of Family Limited Partnership is asset protection. The assets you keep in the partnership are shielded from the limited partners’ creditors. The interests in an FLP can also be easily divided among your family members. The FLP also allows you to transfer ownership of the business to the next generation so they can continue conducting operations.
Gifting with an FLP
Another major benefit of a properly established and maintained FLP is that it can reduce the value of gifts to children and grandchildren. The value of each limited partnership interest given away decreases the value of the taxable estate. Since gifts are made using the annual gift tax exclusion, you might not have to pay any gift tax on the transfer.
Transferring Wealth to Future Generations
Since limited partners can’t direct or control the day-to-day operation of the partnership, a minority discount can be applied to reduce the value of the limited partnership interests that are being gifted. With this strategy, the value of the partnership interests transferred to beneficiaries might be far less than the corresponding value of the assets in the partnership. Furthermore, because the partnership is a closely-held entity and not publicly-traded, a discount can be applied based on the lack of marketability of the limited partnership interest. This allows you to leverage the FLP as a vehicle to transfer more wealth to your beneficiaries while retaining control of the underlying assets.
IRS Issues to Consider
Due to the significant tax benefits, FLPs tend to attract scrutiny from the IRS. This is why it is crucial to ensure your FLP is properly established and operated. The IRS generally look at the following issues when assessing the viability of an FLP:
- Proving It’s Not All About Taxes: You stand a better chance of avoiding or surviving a challenge from the IRS if you can show a significant and legitimate non-tax-related reason the FLP was established. Although tax savings are an important consideration, you must be able to show that there are other reasons for the FLP as well.
- Keep Personal Assets Out of the FLP: While you can reasonably expect to transfer closely held stock or interests in commercial real estate into an FLP, personal property, such as cars or residences, will not look good if you’re challenged by the IRS. Similarly, the FLP’s assets should not be used to pay for any personal expenses. The FLP must be a legitimate business entity operated to fulfill a business purpose.
- Professionally Appraise the FLP: Partners or family members should not determine the valuations or discounts for any assets transferred into the FLP. A qualified appraiser has a much better chance of withstanding IRS scrutiny.
- Don’t Over Do It: People are sometimes tempted to put as many assets into the FLP as possible in order to maximize the asset protection and tax savings benefits. Unfortunately, if the FLP is successfully challenged by the IRS, a substantial portion of a partner’s net worth could be vulnerable to taxes or lawsuits.
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