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    • Point of View
    Quarterly Newsletter

    Family Limited Partnerships

    By Paul S. Doherty, Esq.
    It is simple to establish and use a family limited partnership despite an aura of complexity which has developed around these entities. This newsletter hopefully will simplify family limited partnerships and provide a general understanding of how they work and the purposes they serve. The DIAGRAM is designed to facilitate this understanding.

    In order to establish a a family limited partnership, you must transfer certain of your assets to the partnership or limited liability company formed by you. The form of the organization, either a family limited partnership or a limited liability company ("FLP"), is a vehicle which permits you to significantly reduce your potential taxable estate by giving away assets at substantial discounts to their fair market value. By transferring certain assets such as a business interest or real estate to the FLP you create an organization having transferable units or shares which you can give to children, grandchildren, irrevocable trusts and/or charities. Since you may be giving away a minority, non-voting interest which lacks marketability, you will be entitled to a significant discount from the actual value of the units or shares.

    You will have to file a gift tax return in connection with any gifts of shares or units to any recipient in excess of $10,000 in any year. Normally the gift tax return is filed by your accountant who, in signing gift tax returns, must be comfortable with the valuation of the transferred shares, including the discount which was applied to reduce the amount of the gift.

    Since you may retain the voting shares, which represent a small percentage of the total shares, you will retain control while you give away the non-voting shares either all at once or gradually over a period of years. At some stage in the future you may decide to give away the voting shares which means that voting control of the FLP will pass to the recipients of those shares. Keep in mind that in giving away shares of the FLP you will be transferring to your recipients the pro rata income interest represented by those shares. Thus to the extent that the FLP pays dividends or makes other distributions, these will be made on a pro rata basis to all shareholders based on their percentage interest in the FLP, even though the recipients may not own any voting shares. On the other hand, the FLP may choose not to make actual distributions. In such case, the FLP will likely pay at least an amount equal to the taxes on the income of the FLP attributable to each of the shareholders even though the income itself is not distributed. This payment avoids the shareholders having to pay taxes from their own resources without receiving at least a distribution to pay those taxes.

    Where the intended recipients of the FLP shares are minors or persons otherwise not ready to receive outright ownership of the shares, you may decide to transfer those shares for such beneficiaries to an irrevocable trust which will permit you to remove those shares from you potential taxable estate while not giving them outright to recipients before they are ready to receive them. That trust would have the standard powers in order to take advantage of your annual gift tax exclusion of $10,000 per recipient. You should designate some person or organization other than yourself as a trustee of the irrevocable trust in order to remove any risk that the shares transferred to the trust would be included in your taxable estate.

    Since the Internal Revenue Service looks closely at family limited partnerships, it is wise for you to understand exactly how these entities work and their benefits and risks. A properly established family limited partnership should withstand Internal Revenue Service scrutiny and provide the sought-after tax benefits.

    Paul S. Doherty is a shareholder with Doherty, Wallace, Pillsbury & Murphy, P.C. in Springfield. He has significant experience in business entities, as well as business sales, mergers, acquisitions and taxation.


    DOHERTY, WALLACE, PILLSBURY & MURPHY
    ONE MONARCH PLACE, SUITE 1900
    1414 MAIN STREET
    SPRINGFIELD, MA 01144-1900
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