Large estates run the risk of getting hit with serious tax liabilities related to federal estate taxes. Even if the estate planner wants to give his or her wealth away before death, it could trigger gift tax liabilities. However, creating a family limited partnership (FLP) could be one way to bypass many common estate-related tax liabilities.
An FLP allows the estate planner to protect his or her wealth while staying in control of his or her assets. This estate planning strategy will treat your estate almost as if it were a business, with general partners and limited partners. Often, both parents will be general partners and the children will be limited partners. The general partners will manage the assets and make decisions about investments while the limited partners will maintain an ownership interest and share in income but may not have any control.
An FLP can reduce an estate planner's tax burden through valuation discounts due to their lack of marketability -- known as a discount for lack of marketability (DLOM). In terms of estate taxes, the DLOM may significantly lower the value of the limited partnership and thereby save money on estate taxes. A minority discount could also apply in some cases.
An FLP can also take advantage of a unified credit and annual gift tax exclusion (UCAGTE). Gifts of FLP interests are allowed up to certain amounts without triggering federal gift taxes. Also, via the unified estate and gift tax credit, estates can bypass the federal transfer tax with certain limitations.
Do you want to learn more about FLPs? Devoting some time to learning about this important estate planning tool could help you and your family save a lot of money on estate and gift taxes.