A Family Limited Partnership (FLP) is a sophisticated estate planning and asset management tool often employed by high-net-worth families to consolidate wealth, strategically transfer assets, minimize estate taxes, and ensure asset protection. This guide will delve deeper into the intricacies of an FLP, its creation, operation, and the financial advantages it offers. 

An FLP is a type of partnership where family members pool their assets into a single entity and become partners. In an FLP, there are two types of partners:

1. General Partners (GPs): They hold control over management decisions and bear unlimited liability. This is normally YOU or the person with the estate tax mitigation issue.
2. Limited Partners (LPs): They don't participate in daily management and have limited liability, up to their investment in the FLP.  You can be both a GP and an LP.

FLPs enable a substantial reduction in estate taxes through:

• Discounted Valuation: Assets within an FLP are valued at a discount due to their lack of marketability and the limited control LPs have. This reduces the taxable value of your estate. The IRS will attack valuations that are TOO low, so be careful to use a 3rd party Certified Valuation Analyst who is experienced in this!
• Wealth Transfer: One strategy to transfer wealth and reduce potential estate tax is by gifting FLP (Family Limited Partnership) interests to your heirs on an annual basis. By utilizing the annual gift tax exclusion, you can gradually transfer wealth out of your taxable estate.

The Family Limited Partnership (FLP) structure allows you to maintain control over your assets while transferring ownership to your heirs. This can be a powerful tool for wealth transfer, as it provides a way to pass on assets without incurring significant tax liabilities.

By taking advantage of the annual gift tax exclusion, you can gift a certain amount of FLP interest to each heir every year without triggering any gift tax. The current annual gift tax exclusion limit is $17,000 per recipient, meaning that you can gift up to this amount to each heir without incurring any tax consequences.

In reality, you are gifting LP interests each year and NOT the underlying assets.  For example, each year you gift 1% of your LP interest to your children BUT you continue to maintain control of the managerial decisions since you are the GP as well!

FLPs offer substantial protection against creditors due to the "charging order" protection mechanism. If a creditor obtains a charging order against an LP, they have the right to receive distributions made to the LP, but cannot force distributions or seize the partnership's assets.

For example, if you are a Doctor and get sued personally, they creditors cannot "take" the assets in the FLP.  They can attach to interests but done properly, they cannot force you to take distributions. 

FLPs allow for income splitting and tax-deductible expenses:

• Income Splitting: By transferring income-producing assets into the FLP, the income is divided among partners. If partners are in a lower tax bracket, this can reduce the family's overall tax liability.
  • Example - your children who are 22, have a 12% tax bracket.  Their portion of the S Corp income that flows through the FLP will ultimately be taxed lower than your 37% tax bracket!
• Deductible Expenses: Certain expenses of the FLP, such as management fees, can be deducted, reducing the partnership's taxable income.  This is not a primary income tax mitigation tool but there are some benefits the Anomaly team can weave in for your! 

Creating an FLP requires careful consideration and adherence to legal formalities. Here's a basic rundown:

1. Create the Partnership Agreement: This legal document outlines the rights and responsibilities of the GPs and LPs, the terms for transferring partnership interests, and other operational details.
2. Contribute Assets to the Partnership: These can include cash, real estate, business interests, securities, and other investment assets.
3. Register the FLP: File the necessary documents with your state's Secretary of State and pay the filing fee.
4. Obtain an Employer Identification Number (EIN): This can be done via the IRS website or with help of Anomaly
5. Open a Bank Account for the FLP: This should be separate from any personal accounts.
6. Fund the FLP: Transfer the assets per the partnership agreement.

Remember, the creation and maintenance of an FLP require strict adherence to legal formalities to retain its benefits.

To maintain the benefits of an FLP, strict operational guidelines should be followed:

1. Separation of Personal and Partnership Assets: Never commingle personal and partnership assets. The FLP should have a separate bank account, and expenses should be clearly differentiated.
2. Annual Meetings and Minutes: Formal annual meetings with written minutes provide evidence of the FLP's operation as a separate entity.
3. Proper Distributions: Ensure that any distributions made follow the FLP agreement and are proportionate to ownership interest.
4. Maintain Good Records: Keep accurate financial records and file separate tax returns for the FLP.

Interested in learning more?  Ask your Anomaly Project Manager to set up a time to discuss this further with the appropriate estate and legal counsel!