Estate Planning for Family Business Owners

Posted by Sheri Tucker, M.S., J.D.Apr 08, 20200 Comments

Family business owners need estate planning.  In Estate Planning, the attorney may suggest creating a Family Limited Partnership (FLP) for a family owned business.  Only family members, or their controlled entities, will be partners of the FLP. In Estate Planning, the FLP allows the business to hold and manage assets that family members individually control within the business. Nontax reasons exist for creating the FLP.  In addition, the FLP design allows the business interest to remain in the family.

Family Limited Partnership-Basics

The Family Limited Partnership is registered with the Secretary of State.  There are two types of partners in an FLP — general partners who typically own the largest portions and are responsible for management, and limited partners who own smaller portions and do not have management duties.  For example, a parent is a general partner and the child working in the business is a limited partner. A partnership operating agreement sets out shares, profits, liquidation, and buy-out issues.

Family Limited Partnership – Creditors

What happens if a limited partner has creditor issues?  Management of assets is separated out from the ownership of assets.  Specific estate planning for FLPs may offer protection against a family member's creditors.  The outside creditor cannot reach into the whole business for payment of a family member's debt.  The creditor may reach into the interest held by the family member. If a creditor becomes entitled to distributions, an involuntary transfer of that ownership occurs.  Therefore, it is important that the operation agreement includes triggers for buy-out options.

Tax Considerations

When transferring shares to the children, FLPs offer transfer tax savings.  The IRS scrutinizes the FLP to make sure it is organized correctly. Mainly, property issues arise when a partner dies when determining the status of estate property valuation.  The IRS will review the nature of the transfers to determine if transfers occurred correctly. The tax code will take precedence over the operation agreement when determining liquidity transfers.  As with all IRS rules, tax savings from partnership interests depends on current IRS laws, which are subject to change.

Family Business– Succession Plan

Family business owners tend to want the business to pass down to children and grandchildren.  Many small family owned businesses do not make it to the third generation. Legacy building plans start early.  One nontax reason to create a family limited partnership is to slowly transfer ownership of the business to children or grandchildren.  Management succession planning is an important tool in estate planning for family business owners. Parents maintain control of the business as general partners.  Shares may be gifted to the children as a limited partner. The transferring of shares preserves family ownership of management. Children gradually learn about the business, which helps build a legacy.

Who can help me create a Family Limited Partnership?

I am here to help you with your small business and estate planning. I am an experienced estate planning attorney here to help the family business owner.  I help families and individuals find the best ways to protect their assets in the present and in the future. If you are ready to create a Family Limited Partnership, need more information, or have other estate planning matters I can help you.  I want to see your business legacy continue. Contact me today at 314-332-0011 or book a complimentary consultation with me today.