An FLP is a limited partnership created under state law with the primary purpose of transferring wealth to younger generations/heirs during one’s life while retaining control of the assets and ensuring wealth transfers to the intended individuals and charities. The FLP takes advantage of gifting strategies and potentially steep valuation discounts on limited partner interests for lack of control and lack of marketability.
One or more family members transfer highly appreciating property to a limited partnership in return for 1% general partner (GP) interest and a 99% limited partner (LP) interest. The GP has the sole management rights of the partnership while LPs are passive investors with no control over the management of the partnership.
FLPs have several unique features that make them extremely powerful from a financial planning perspective:
The Treasury department has issued newly Proposed Regulations under IRC Section 2704 that would severely limit these beneficial valuation discounts for any type of family business transfer where the family will retain control before and after the gift/bequest.
The IRS public hearing on these regulations will be on December 1st, 2016 and, if approved, there will be a review period before the final issuance. Various industry experts speculate that the proposed regulations could become final as soon as year-end 2016, although the process could be delayed to mid-2017 or later. Therefore, limited time may remain to take advantage of this wealth transfer strategy and the related valuation discounts before the new rule comes into play.
We would be happy to talk with you and your estate planning attorney about the potential impact of the proposed regulations on your situation and the planning issues they may present. Please contact Robert and/or Seth in our Wealth Strategies group (617-536-0333) if we can be of any assistance.
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