An Ohio Family Limited Partnership has become a popular estate planning tool used by many families as a way to transfer assets and/or a business to other family members, to limit liability for family members, and to reduce the amount of gift and estate tax assessed against family assets and businesses.
Below we highlight three of the most common advantages and disadvantages of a Family Limited Partnership. Depending on your family’s unique situation and your specific goals, there may be several other advantages and disadvantages you should explore with one of our qualified and knowledgeable Ohio estate planning attorneys.
ADVANTAGE: Transferring the Family Business to the Next Generation
Turning over a family business to the next generation can bring a mixture of emotions, including joy, apprehension, and hesitation. Are your children or grandchildren ready to take over the family business or are they ready to take a leading position beside you in operating the business. An advantage of a Family Limited Partnership is you have more control over how and when you transfer business ownership to other family members. You can slowly bring new members of the family into the partnership thereby limiting their control of the business while also limiting their liability if something should go wrong.
ADVANTAGE & DISADVANTAGE: Lawsuit Protection
Lawsuit protection can be both an advantage and a disadvantage of Family Limited Partnerships. For limited partners, an FLP is an advantage because the limited partner’s personal assets are not at risk if the partnership is sued. Likewise, if a limited partner is sued for reasons unrelated to the partnership, the partnership’s assets are not at risk. The judgment creditor may only be entitled to the limited partner’s payments from the FLP to satisfy the debt—it is not entitled to the assets owned by the FLP to satisfy the debt.
On the other hand, a general partner has unlimited liability. If the partnership is sued, the judgment creditor can attack the general partner’s personal assets if the FLP does not have sufficient assets or funds to pay the judgment. In many cases, the general party is a Limited Liability Company rather than an individual in order to reduce the liability to any one individual.
ADVANTAGE & DISADVANTAGE: Cost of Forming a Family Limited Partnership
As with lawsuit protection, this issue can also be both an advantage and a disadvantage of a Family Limited Partnership. The upfront costs of forming an FLP can be expensive; however, the tax advantages of an FLP greatly outweigh the initial costs to form the FLP. You must remember that the assets of the FLP are not owned by the limited or general partners—they are owned by the partnership. Therefore, the tax implications to the partners (and their recipients) when they wish to “gift” or “pass down” interests in the partnership could be substantially lower compared to gifting or bequeathing the actual assets held by the partnership to beneficiaries.
Contact a Qualified Ohio Family Limited Partnership Attorney
If you have questions about setting up or operating an Ohio FLP, please contact Lovett & House Co., LPA to schedule a confidential consultation with one of our attorneys. We can answer all of your questions about Family Limited Partnerships and provide you with sound legal advice regarding whether this is the best option to protect your family and your family’s assets and business.