Passing down family wealth, and/or a family business, can be a challenging estate planning goal. In Illinois, there are numerous and varied concerns that must be taken into consideration when passing down a business from one generation to the next. While there is more than one way to accomplish this goal a common solution is to create a Family Limited Partnership, or FLP.
Often, there are two separate issues involved in transferring ownership of family assets. One issue involves transferring the management responsibilities while the other involves the legal transfer of ownership. Understandably, the idea of simply gifting the family business to your children at the time of your death may not be an appealing option. Tax considerations aside, gifting a business without preparing the recipient with the necessary skills to run the business is a surefire recipe for failure. Knowing this, you may be looking for a way to slowly transfer ownership of family assets to the next generation. A family limited partnership in Illinois allows you to do just this.
An FLP operates in much the same way as any other limited partnership in that there are two levels of partnership – general partners and limited partners. Typically, a senior family member will transfer assets into the partnership in return for a small general partnership interest in a large limited partnership interest. By retaining general partnership interest the senior family member will retain the right to manage the company as well as shoulder the liability of the company.
Over time the senior family member will gift his or her limited partnership interests to members of the next generation. Often, those interests can be gifted using the annual exclusion to gift and estate taxes. Furthermore, gifts of limited partnership interests are often eligible for valuation discounts. In essence this process allows a senior family member to transfer ownership of the business over time while incurring a minimum tax liability.
Moreover, the slow transfer of assets also allows plenty of time for members of the next generation to learn how to manage the business. In the meantime, those who hold a limited partnership interest may earn income without having the right to interfere in the day-to-day running of the business.
Both the practical and tax advantages to a FLP should be obvious at this point. If you think that a FLP may be the answer to your concerns regarding the transfer of family wealth and/or a family business be sure to sit down and discuss your options with your estate planning attorney.
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