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Family Limited Partnerships

A Family Limited Partnership is a limited partnership whose partners are generally members of the same family and is formed to own real estate, securities, and other assets and to invest and reinvest those assets for the partners.

Structure of a Family Limited Partnership

The family limited partnership is typically structured so that there is a 1% to 10% general partnership interest and a 99% to 90% limited partnership interest. As an example, if an individual owns a 16% interest in the underlying asset, then in return for their transfer of their interest in the underlying asset to the family limited partnership, they would receive a 1.6% general partnership interest (16% of a 10% general partnership interest) and a 14.4% limited partnership interest (16% of a 90% limited partnership interest).

The general partners have management control. Management is typically by majority vote of the general partners based on their percentage interests. The limited partners have no voice in the day-to-day operations of the partnership.

Distributions from the partnership are made to the partners in proportion to their combined general and limited partnership interests. The general partners typically determine whether or not distributions will be made from the partnership.

Tax Advantages

For gift and estate tax purposes, the fair market value of an interest in a family partnership is usually less than the fair market value of the partnership assets if they were held directly by the partners. The fair market value of the general and limited partnership interests is determined first by valuing the assets held by the partnership and second by discounting the value of those assets to reflect the lack of marketability of a general or limited partnership interest. The discounted valuation may result in a lower gift or estate tax cost for the transfer of the assets to children of other beneficiaries.

To assure that any discount claimed on these gifts will survive an IRS challenge, it is generally recommended that an appraiser be employed to value the partnership interests.

Non-Tax Advantages

A Family Limited Partnership can also provide more efficient and convenient management of the assets in the partnership.

Typically, management is controlled by the general partners who can decide to sell or refinance a property without the necessity of unanimous consent of all partners or co-owners. The general partners also have flexibility as to the timing and amount of distributions made to each of the partners.

There may also be some limited creditor protection. A creditor of a limited partner typically cannot pierce a family limited partnership to get at the underlying asset. The creditor is typically entitled to only the distributions that are made to that limited partner. The general partners could decide not to make any distributions, if that was appropriate, and this would further limit the creditor’s interest in taking a limited partner’s interest in the partnership to satisfy the debt.

Disadvantages

The primary disadvantages of a family limited partnership are the cost of establishing the partnership, the administrative burdens of operating the partnership and keeping records, and the costs of income tax returns in connection with the partnership.

B|O|S maintains an estate planning glossary that further defines many of the terms used in this memo. If you wish to receive a copy of the glossary, please contact a member of your dedicated wealth management team.

Updated January 2018

Disclosure:

This white paper is for informational purposes only and is not intended to be used as a general guide to investing or financial planning, or as a source of any specific recommendations, and makes no implied or express recommendations concerning the manner in which any individual’s account should or would be handled, as appropriate investment strategies depend upon the individual’s specific objectives. It is the responsibility of any person or persons in possession of this material to inform himself or herself of and to seek appropriate advice regarding any investment or financial planning decisions, legal requirements, and taxation regulations which might be relevant to the topic of this white paper or the subscription, purchase, holding, exchange, redemption or disposal of any investments.

The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk. Past performance is not indicative of future results, which may vary. The value of investments and the income derived from investments can go down as well as up. Future returns are not guaranteed and inherent in any investment is the potential for loss.

This white paper does not constitute a solicitation in any jurisdiction in which such a solicitation is unlawful or to any person to whom it is unlawful. Moreover, this white paper neither constitutes an offer to enter into an investment agreement with the recipient nor an invitation to respond by making an offer to enter into an investment agreement.

Opinions expressed are current opinions as of the date appearing in this material only and are subject to change. No part of this material may, without the prior written consent of Bingham, Osborn & Scarborough, LLC, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

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