Wills & Trusts - Family Limited Partnership (FLP)

A Family Limited Partnership (or FLP) is simply a limited partnership in which all or most of the partners are family members. The arrangement is often structured so that senior family members transfer property to the FLP in exchange for a general partnership interest (e.g., 1%) and a limited partnership interest (e.g., 99%). A better approach might be for the initial capitalization to take place pro rata, with the junior family members making a contribution on their own, such that the limited and general partnership interests are initially owned in the same proportions by the junior and senior family members.

Some portion of the senior family members’ interests can then be transferred to junior family members by gift or sale over the senior family members’ lifetimes. Whoever controls the general partnership interest, controls the day-to-day operations of the partnership. Often, the senior family members will own the majority of the general partnership interests and will act as managing partner(s). There may be liability reasons, however, where control may not be desired.

Usually, the general partner will be a corporation or Limited Liability Company (LLC). If the general partner is not a corporation, there will usually be more than one general partner. The partnership is usually for a fixed term of years.

The following are important things to know about FLPs:

• It is important to note that no partner has the unilateral right to liquidate the partnership. This means that in order for the partnership to be dissolved before the end of its stated term, all partners must agree.
• Partnership earnings may be retained by the partnership for reasonable business needs at the discretion of the managing partner.
• General partners must approve the admittance of a new or substitute limited partner.
• The partnership has the “right of first refusal” to purchase a transferring partner’s partnership interest.
• Partnership interests cannot be pledged for debts.

We routinely utilize Family Limited Partnerships in our estate planning practice on behalf of our clients and would be glad to determine if an FLP would be appropriate, beneficial and cost effective for your situation.