Not all property should be transferred to the family limited partnership. As there must be a legitimate business purpose for the formation of the partnership, a family home that is used as the primary residence is, for example, typically not transferred. Rental and investment property and cash assets are more commonly transferred.
The formation of the family limited partnership must be done specifically. The following items must be stated outright from the start: the business purpose, how the partnership is organized, how assets are to be distributed, and how the partnership may be terminated.
Additionally, there must be at least one general partner and one limited partner. Generally, there are multiple limited partners comprised of the children and grandchildren of the individual or couple who originally owned all the assets. The individual or couple usually takes on the role of the general partner(s). It is important to understand how general partners and limited partners differ both in their roles in the family limited partnership and in their liability.
Limited partners have limited or no duties in the day-to-day management of the business of the partnership. Limited partners have limited liability, usually limited to their initial investment transferred to the partnership. General partners have much greater management roles and proportionately greater liability.
However, because limited partners have very little control of the business interests and also because the terms of the family limited partnership almost always restrict to whom their interest may be sold (typically to other family members), limited partnerships are considered less valuable than general partnerships. For example, if a limited partner owned a 1% share with a total business value of $1,000,000.00, it would seem to be worth $10,000.00. But a discounted value due to the above may be closer to $6,000.00.
Thus, a general partner could transfer more assets to a limited partner without tax consequences than he or she could without the family limited partnership in place.
Although they are a form of a limited partnership, family limited partnerships can be complex and are often carefully scrutinized by the Internal Revenue Service. It is for this reason that an estate planning attorney recommends consultation with someone experienced in each of these three areas: estate planning, business formation, and tax law. For a free initial consultation with experienced estate planning legal team at Romano & Sumner, please contact our Houston law offices.
Romano & Sumner, PLLC