Business and family are often intermixed. In some cases, it might make sense to make this relationship a legal formality. Family members, like anyone else, can create a partnership to manage their savings and assets. In the world of business law this is referred to as a Family Limited Partnership (FLP). Find out how you can incorporate this type of business entity into your overall estate planning process.
In essence, an FLP is really just a business partnership. As defined by the Utah Uniform Partnership Act, a partnership is an association of two or more people in a business for profit.
There can be two types of partners in this relationship. General partners are responsible for managing the business. They also share in profits and liability. A partnership may also have limited partners who act as investors in the endeavor. These limited partners do not operate the business on a daily basis. Yet, they benefit from decreased exposure when it comes to liability. At the heart of it, the relationship between general and limited partners forms the basic partnership structure.
You'll find a similar structure in an FLP setting. Usually, the general partners will be senior members of the family. These are the relatives that have the funds and assets to create the partnership. The general partners of the family will transfer their assets into the partnership where they will retain total control. At the same time, the general partners will also be subject to full liability. The limited partners will be younger members of the family for whom the FLP is intended to protect. Again, the limited partners can enjoy some of the benefits of the company without exposing themselves to full liability.
There are several reasons why FLPs are commonly used in estate law. First, these entities provide protection for the family's assets. This is due to the fact that the FLP is considered a separate legal entity. Thus, once assets are transferred to the FLP they are legally owned by the entity. Future creditors will likely be barred from the assets due to this separate ownership.
FLPs are also popular because they can help reduce the impact of estate taxes. Normally, when a person passes away, taxes may be imposed on the transfer of property to heirs. Although Utah does not impose a state-based tax, federal taxation still applies. The federal estate tax can cost up to 40 percent of the estate. You can avoid taking this hit if you transfer certain assets into the ownership of the FLP.
Use of an FLP also makes wealth management more flexible. The partnership agreement can allow for modifications. Partners can agree to transfer assets in and out of the business as needed.
Finally, FLPs can act as wealth distribution tools. The partners can use limited partnership shares to spread their wealth to different individuals. In this sense, it can be easier to distribute portions of the overall estate to heirs. It also serves to reduce the total amount of assets held by any one individual.
The first step to setting up an FLP is to consult with a business law attorney who is familiar with end of life law. There are many legal and tax-related requirements involved in the process. Remember, you'll be starting an actual business in addition to estate planning. Get help from an experienced attorney to navigate all of the complexities.
If you have questions regarding business law or estate law in Utah, contact TR Spencer & Associates today.