Time is Running Out for Maximizing the Effectiveness of Family Limited Partnerships in Your Estate Plan

25 Aug

Time is Running Out for Maximizing the Effectiveness of Family Limited Partnerships in Your Estate Plan

Establishing a family limited partnership can be helpful in business succession planning, business continuity plans, and as a component of your estate plan. It is especially helpful if you own real estate, a family business, and concentrated positions of publicly traded stock. However, the IRS is starting to scrutinize these partnerships and has proposed a new regulation, specifically a revised versionof Section 2704 that could have a dramatic impact on your estate planning by eliminating valuation discounts.

If you are looking to minimize your future estate tax this is critical and time is of the essence. Once the revised Section 2704 is in effect, which could be around the end of calendar year 2016, the ability to claim discounts might be substantially reduced or eliminated thus curtailing your tax and asset protection planning flexibility.

Managing Estate Taxes

Ashburn estate planning attorney, estate planning law firmIf you own the aforementioned combination of real estate, a successful business, stock options, etc. you are likely to have a substantial estate that may subject to potentially burdensome estate taxes. A family limited partnership can provide a vehicle for you maintain control of your company and effectively minimize estate taxes. As mentioned above, a family limited partnership affords this flexibility now, but may be dramatically altered if and when the new Section 2704 goes into effect.

Business Succession Planning

In addition to helping manage a potentially onerous estate tax bill, a family limited partnership could allow you to continue to run your family business while allowing growth in your company to occur in your offspring’s names. This is because a family limited partnership is essentially a joint venture between family members. The partnership is comprised of both general and limited partners which enables you to maintain control of the business while reducing your taxable estate through gifting interests to the beneficiaries.

Example of How a Family Limited Partnership Would Work

Let’s say we have a successful real estate broker named Mr. Smith. He is approximately 53 years old, married with two teen-aged children, and is the owner of his own real estate brokerage firm. Mr. Smith has an estate worth approximately twelve million dollars

In addition to his real estate business, Mr. Smith owns his home, along with two rental properties in Florida and South Carolina. In this scenario, each property owned by Mr. Smith could be placed into a family limited partnership.

The reason for treating each real estate asset individually and placing each one in its own family limited partnership is to help minimize the risk associated with potential litigation. If a family limited partnership is sued (e.g., someone gets hurt on the rental property) the assets could be protected from law suits.  He could also place personal bank and brokerage accounts into the family limited partnership. The same goes for his ownership interests in his business.

Speak to an Experienced Estate Planning Attorney

If you are interested in learning whether it makes sense to establish a family limited partnership as a component of your estate plan, reach out to Insight Law. As mentioned, time is of the essence. New regulations being implemented by the IRS may curtail the effectiveness of family limited partnerships, so you need to take action sooner rather than later.

Insight Law is one of the few firms in the United States with a formal ongoing maintenance and education program for our clients. Our goal is to keep your plan up to date by routinely integrating changes in your life, changes in the law, and changes in planning techniques.