Could an FLP Fit Into Your Succession Plan ?
Among the biggest long-term concerns of many business owners is succession planning — how to smoothly and safely transfer ownership and control of the company to the next generation .
From a tax perspective , the optimal time to start this process is long before the owner is ready to give up control . A family limited partnership ( FLP ) can help you enjoy the tax benefits of gradually transferring ownership while you continue to run the business .
How it Works
To establish an FLP , you ’ ll begin with transferring your ownership interests to a partnership in exchange for both general and limited partnership interests . Then transfer limited partnership interests to your children or other beneficiaries .
You retain the general partnership interest , which may be as little as 1 % of the assets . However , as general partner , you still run day-to-day operations and make business decisions .
Tax Benefits
As you transfer the FLP interests , their value is removed from your taxable estate . The future business income and asset appreciation associated with those interests then move to the next generation .
Because your children hold limited partnership interests , they have no control over the FLP , and thus no control over the business . They also can ’ t sell their interests without your consent or force liquidation .
Some Risks
Perhaps the biggest downside is that the Internal Revenue Service ( IRS ) tends to scrutinize how FLPs are structured . If it determines that discounts are excessive or that your FLP has no valid business purpose beyond minimizing taxes , it could assess additional taxes , interest and penalties .
The IRS also pays close attention to how FLPs are administered . Lack of attention to partnership formalities , for instance , can indicate that an FLP was set up solely as a tax-avoidance strategy .
Not for Everyone
An FLP can be an effective succession and estate planning tool but , as noted , it ’ s far from risk free . Doeren Mayhew can help you determine whether one is right for you and advise you on other ways to develop a sound succession plan . Contact us today to learn more . ■
The lack of control and lack of an outside market for the FLP interests generally mean the interests can be valued at a discount — so greater portions of the business can be transferred before triggering gift tax . For example , let ’ s say the discount is 25 %. That means , in 2022 , you could gift an FLP interest equal to as much as $ 21,333 ( on a controlling basis ) tax-free because the discounted value wouldn ’ t exceed the $ 16,000 annual gift tax exclusion .
There also may be income tax benefits . The FLP ’ s income will flow through to the partners for income tax purposes . Your children may be in a lower tax bracket , potentially reducing the amount of income tax paid overall by the family .
Issue 1 | 2022 VIEWpoint 7