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Other Tax Benefits
Minority discount estate tax savings can be even more drastic if a client can gift all or part of their $600,000 unified credit. For instance, if one was able to gift $1,000,000 to a Family Limited Partnership and take a 40% minority discount, the gift would only use their $600,00 unified credit while removing $1,000,000 of assets, plus any appreciation thereon, from their estate.
A Family Limited Partnership is typically taxed like a regular partnership whereby all income and deductions flow to the partners pro rata, based upon their Partnership interest. This can be altered by agreement, and certain tax laws may effect the income and deductions that flow through to each Partner.
The Partnership must file tax returns with the Federal Government and distribute K-1's to the individual Partners so that their share of the income and deductions of the Partnership can be shown on their individual 1040's.
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More Tax Benefits
Unlike a regular corporation, there is no tax imposed on a Limited Partnership and, unlike an S Corporation, there is generally no tax when assets are conveyed from the entity to its partners. Limitations that apply to S Corporation ownership do not apply to Family Limited Partnerships.
Some of the complexities that must be addressed when establishing a Family Limited Partnership include making sure that the Partnership Agreement is carefully drafted so the Partnership is qualified as such under Federal tax law, and that income and expenses of the Partnership are properly allocated between the General and Limited Partners. The General Partner must also be "adequately capitalized" according to state creditor law regulating partnerships can be significantly more complicated than other areas of Federal tax. It is definitely advantageous to use proper planning to avoid potential tax complications.
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Remove Assets from Your Estate
A Family Limited Partnership is an excellent way to remove a significant amount of assets from your estate while retaining control of those assets. Family Limited Partnerships can be flexible and provide a means to keep assets in the family.
How can a Family Limited Partnership help your family? Assume that a father sets up a Family Limited Partnership. He is a General Partner owning 1% and a Limited Partner owning 90%, and both of his children own 4.5%. The following protections can apply:
1. If the father is sued, creditors cannot seize Partnership assets ( assuming that the Partnership was set up before any creditor problems began).
2. If a child gets divorced or is subject to creditor claims, the divorced spouse or creditor (s) cannot obtain Partnership assets.
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