A tool to pass wealth to future generations

A Family Limited Partnership (FLP) is a legal asset vehicle that can ensure wealth is preserved from generation to generation by pooling the control of assets. An FLP can minimize tax consequences in transferring wealth to your descendants, protect assets from creditors and judgments, and also keep assets out of probate.

FLPs are extremely useful tools for wealth preservation, but also require careful planning. Consulting with an attorney experienced in wealth preservation is recommended if you are considering forming an FLP or are seeking guidance in how to manage an FLP.

The Osterman Law Firm has been assisting Denver families in structuring Family Limited Partnerships for over 30 years. If you believe your family may benefit from an FLP, contact David Osterman online or at 303-759-3199 today for an initial consultation.

Your questions answered: How FLPs work

FLPs are structured similarly to traditional business partnerships, with both general and limited partners. They differ in that participation in the partnership is limited only to family members.

General partners, who are usually older family members, participate in the management of the FLP, such as investment decisions, and are also liable for the decisions of the FLP. General partners contribute their assets to the FLP in order to be named as a general partner in the FLP. A portion of this interest in assets can be transferred to younger limited partners directly, or through a trust.

Limited partners do not participate in the FLP’s decision-making and cannot liquidate or transfer their interest in the FLP. Distribution of assets to limited partners is at the discretion of general partners. No matter what percentage of assets limited partners control in an FLP, they do not have the decision-making powers that general partners have.

An FLP must be formed for valid business reasons beyond merely the avoidance of taxes. Common valid business reasons for forming an FLP include simplified gifting to other family members, consolidated management of family assets, avoidance of family disputes upon the death of a family member, and to ensure assets stay in a family.

Why consider an FLP?

Real estate, business interests, and securities are all examples of assets that can be held by an FLP. Assets put into an FLP are not subject to estate taxes. However, placing these assets in an FLP allow general partners to continue to control these assets until such a time as they are transferred to limited partners.

An FLP is not a taxable entity. General partners instead report the FLP’s income on their personal tax returns.

General partners are entitled to reasonable management fees for their management of an FLP. Income from the FLP can also be used to pay salaries to family members employed by the FLP, as well as to provide other benefits, such as health insurance.

FLPs offer protection from creditors

An FLP can protect assets from either creditors or changes in family circumstances. Creditors cannot gain an interest in an asset that a limited partner has an interest in without the consent of a general partner. It is also significantly more difficult to for a judgment to be attached to an asset held by an FLP.

Partnership documents can require a limited partner to transfer his or her interest in the partnership back to the FLP upon divorce or another change in family circumstances. Such provisions ensure that family assets stay within an FLP. 

If you believe your family may benefit from an FLP, contact David Osterman online or at 303-759-3199 today for an initial consultation.