Legal Question in Wills and Trusts in New York

Re: Family Limited Partnership

The purported tax benefits of a family limited partnership may be an illusion, that is they may not exist.

First, the family should be rich.

Second, the family's wealth is dominated by one or several strong members.

Essentially the family wealth is pooled in the family partner limited partnership (the partnership gets title to the assets) and it is managed by the general partner (those are the powerful guys in the family) and the limited partners have no say in management but share in income.

The major tax benefit comes about in the gift and estate tax area. The wealthy members of the family give partnership interests to the younger generation or poorer members. The value of the gift is not based solely on the value of the assets held by the partnership but by a discounted value of the limited partnership interset. The discount in value is justified by the fact that the limited partners have no say in management and may not be able to sell a limited partnership interest in a free and open market.

The idea is that wealth can be transferred to the younger generation at a discounted value, thereby saving on gift and estate tax.

The concept is that the parts are less valuable than the whole, and there is no assurance that the plan will work.

The whole field of limited family partnerships is complex and sound legal guidance is highly recommended.

Re: Family Limited Partnership

There are a variety of times and reasons for use of this type of entity, which range from estate planning, to asset protection, to income tax planning. By creating a family limited partnership, the assets placed in the partnership can be distributed among family members at a discount from true value, since limted partnership interests are being distributed. The discount can range from 25% to 33-1/3% depending upon the type of assets the partnership owns. Thus, if the partnership had assets worth $1,000,000, each 1% interest would be worth $10,000. If the primary owner gave away 1% to another family member, and the 1/3 discount applied, $15,000 of value could be gifted at $10,000 gift value. Thus, actually 1-1/2% could be gifted, not 1%. This would make the gift eligible for annual gifting, without a gift tax being paid. This could be done for each family member each year unless someone received more than a 50% interest, in which case the discount would not apply. Thus, estate reduction can be accomplished, faster since the discount is used. Assets in the partnership are protected from claims against creditors of the partners, except that a creditor could assume the partner's interest in the partnership, but since minority interests will probably be involved, value in indeterminate. Limited Partners have minimal rights so an action for partition of the property can be withheld. Limited Partners have limited liability, so claims against them for partnership liabilities cannot be made personal. Income from the partnership is allocated to the partners based upon their ownership interest, so income tax benefits may be obtained, if children are the limited partners and have lower tax brackets. This is a good entity to use to create a college fund for minor children. Plus, estate and income tax benefits can be maximized if equity value of the partnership assets is low (such as a new piece of real estate subject to a mortgage). If you want to discuss this in further detail, call me at 973-377-3313. I recommend this frequently for real estate ventures, office leases, etc. for use between parents and children.

Walter