Setting up a Family Limited Partnership

Posted by Debby EhrlichNov 08, 20210 Comments

Think of your favorite family-owned restaurant in San Diego? There's something about the notion of one generation handing down secret recipes to another that just makes the sauce taste better. That's the key to the business's generational success, right? It sure doesn't hurt, but in truth, the family probably has another ingredient up their sleeve—the family limited partnership, aka “FLP.”

Why is a Family Limited Partnership a Good Idea?

FLPs operate like traditional limited partnerships, but with the added estate planning benefit of keeping it in the family. Not only can families run commercial businesses through their FLP, but the FLP can also be used to hold investment property for future generations.

Control: FLPs are comprised of general partners and limited partners. Most commonly, the older generation creates the FLP and places their assets into the entity. The older generation will maintain general partner control while giving limited partner control over time to their children and grandchildren. As the name indicates, limited partners have limited control, and all of the big, decision-making authority is vested with the general partners.

Tax Benefits: When done correctly, assets transferred by the general partners to the limited partners through the FLP vehicle can avoid significant estate taxes, gift taxes, and taxes associated with the appreciation of assets.

Asset Protection: Assets moved into the FLP enjoy greater protections from debt liabilities and lawsuits.

Creating Your Family Limited Partnership in California

In some ways, setting up the FLP is not all that difficult. You pick a name, choose your partners, and file the paperwork and fees with the California Secretary of State. Before undertaking this task on your own, you need to know that, if done improperly, the FLP can cause more harm than good. FLPs are sophisticated tools that need to be managed like a sophisticated business. You'll need to maintain separate bank accounts, hold partner meetings, keep organized records, and pay recurring administrative fees. 

Hire an Experienced California Estate Planning Attorney

Although there are relatively few steps required in setting up an FLP, these entities are complex tools that should be created and maintained with care to avoid tax penalties. Further, the IRS is particularly keen on cracking down on FLPs. This isn't to say that an FLP isn't still a wonderful tool for protecting and managing family assets, but experienced legal counsel should be sought out before you file the papers with the state.