FLP’s FOR LOWER TAXES

​Family Limited Partnerships are unique planning tools that offer powerful asset protection for heirs, especially when coupled with trust funds.

FLP’s FOR LOWER TAXES
By Pierre Mouchette | Real Property Experts LLC

Family Limited Partnerships have had an essential role in lowering gift taxes and estate taxes for generations. These unique planning tools can also offer powerful asset protection for heirs, especially when coupled with trust funds.  They are the current cornerstone of wealth management planning strategies.
 
Allows Families to Keep More Wealth in Their Pockets
As an investor, you already know it’s not only about how much money you make, it is how much you keep.  In addition to watching out for nuisance expenses such as brokerage commissions, it is crucial to learn how to lower taxes.  Most new investors think only about capital gains taxes, but gift taxes and estate taxes are equally important considerations for those approaching retirement.
By pooling your investments in a particular type of legal structure known as a Family Limited Partnership, you can transfer your assets, such as stocks, bonds, real estate, etc., to heirs by gifting partnership equity each year up to the gift tax limits.  This is a great way to help you keep the investments you build up through decades of hard work in your family rather than having the government take them.
 
Use the Annual Gift Tax Exclusion to Gift Tax-Free Family Limited Partnership Units to Your Heirs
Married couples can combine their annual gift tax exclusions and effectively double the money they can give.  For the tax year 2019, the exclusion is $15,000 per person (and married couples can provide a specific person $30,000 between them).  The tax year 2019 adjustments are generally used on tax returns filed in 2020.
Gifts to minor children can be accomplished using the:

• Uniform Transfers to Minors Act (UTMA) - a uniform act drafted and recommended by the National Conference of Commissioners on Uniform State Laws.  Under UTMA, a custodian can hold a property for a minor, invest it, and use it for the minor’s benefit.  The grantor transferring assets to the minor names the custodian, and the custodian’s function is as a trustee for the minor.  
  For income tax purposes, the assets in a UTMA account belong to the minor.  The account uses the minor’s social security number.  All income is reported on the minor’s  own 1040. 

• Spendthrift Trust (Wikipedia definition) - a trust created for the benefit of a person (often unable to control their spending) that gives an independent trustee full authority to decide how the trust funds may be spent for the benefit of the beneficiary.  Creditors of the beneficiary generally cannot reach the funds in the trust, and the funds are not actually under the control of the beneficiary.  A trust generally will not be treated as a spendthrift trust unless the trust agreement contains language showing that the creator intended the trust to qualify as spendthrift. This is what is known as a spendthrift clause or spendthrift provision.      
  A spendthrift provision creates an irrevocable trust preventing creditors from attaching the interest of the beneficiary in the trust before that interest (cash or property) is distributed to him or her.  Most well-drafted irrevocable trusts contain spendthrift provisions even though the beneficiaries are not known to be spendthrifts.  This is because such a provision protects the trust and the beneficiary in the event a beneficiary is sued, and a judgment creditor attempts to attach the beneficiary's interest in the trust.

 
Using Liquidity Discounts with A Family Limited Partnership Can Result in Larger Tax Savings
Units of the Family Limited Partnerships (FLP) can often qualify for discounts for lack of marketability.  What this means is the IRS will not value the partnership units at their net asset value.  They will perform a series of formulated calculations to account for things like a lack of control, inability to sell unless the majority holders agree to it, and other drawbacks that are not present in property gifted outright without restrictions. 
Because you and your spouse, as general partners of the FLP, still control it even after you have made the gift to your children and grandchildren, the gift is not worth as much as it would have been if you handed them shares of stock or cash that they could deposit in a bank. 
 
Final Thoughts on Family Limited Partnerships and Tax Savings
The above point is to demonstrate how FLPs, used judiciously and with foresight, can result in enormous tax savings.  In addition to unparalleled flexibility, they can also help protect your assets depending on how and through which entities and legal structures you create.  The entities described can serve you and your family as part of a comprehensive strategy to preserve, grow, and pass on your hard-earned wealth.  This is especially true when used with other investment tax strategies and structures such as charitable remainder trusts and/or taking advantage of the twin combination of deferred tax liabilities and the stepped-up basis loophole.