You’re probably already wondering what they are. A family limited partnership is essentially a highly legalized way of assigning specific responsibilities to a particular partner, and this kind of partnership is most often used to transfer wealth from one generation to the next. It’s the type of thing that already happens all the time without the help of the legal world, so it isn’t such a shock that we might think to formalize the process.
In a family limited partnership, a “general” partner maintains the responsibility to manage investments. In this case, responsibility equates to liability. If those investments fall through, then the general partner is liable for that loss.
A “limited” partner gives up the right to manage these affairs, and as a result they enjoy limited liability. Because the legal function of the partnership is to limit responsibility to one party most of the time, the joint income and associated deductions will be reported on a personal tax return.
Okay, so now you know what the legal definitions of these family limited partnerships are–but what are they used for? Let’s say you’ve enjoyed a life of bounty, and you’re ready to retire from the world of responsibility. Your assets have grown to the point of bursting, and you no longer want to manage them. You also want your children and grandchildren to have an established portion of those assets either before or after you pass away. That’s where this type of arrangement can become beneficial. You’ll sign away some of these assets–maintaining all of the liability for those assets–but you can still govern how those assets are arranged. They’re yours to invest as you see fit.
These arrangements aren’t just for the super-rich, as there are other reasons you might want to draw up papers. That’s just one example of what you might do with such a partnership, but why would you do it?
The answer to that question is simple: it’s the same reason you would smartly invest time and money into any sort of estate management or probate action. You want to reduce the taxes you pay. By handing your assets to other members of your family, you can avoid some of Uncle Sam’s cut at the same time continuing to oversee the management of the assets and acquiring any interest accrued from them.
Another way to save money is by way of the annual gift tax exclusion. When your wealth transitions to the partners, the value of any shares you hold may be eligible as a tax deduction because the limited partners have no control over how the assets are invested. It’s this kind of flexibility that can result in mutually beneficial arrangements for your family. You can take what would normally be a number of different investment accounts for any potential heirs, and combine them into only one. This makes management of investments infinitely easier and less expensive than it would be otherwise.
You might be thinking that there’s a catch, but that really isn’t the case. The only thing that should worry you are the state laws where you live, which can change how the process is governed. Members of such an arrangement should all be well versed in the responsibilities they will hold once the partnership is established, not to mention the responsibilities that they will give up. What are your rights when you sign into such an agreement, and how much might they change as time goes on? These are questions to discuss with a trusted lawyer, who will be able to formulate a sensible financial and legal strategy for your family and its future.
If you think that a family limited partnership is something that your family might be interested in considering, then you must draft a limited partnership agreement in writing. Once the agreement is made, the transition of wealth will be formally conducted.