I’m often contacted by business owners that want to leave their business to a son, daughter, or other family member.  Others are looking to leave substantial investment portfolios or real estate holdings to their descendants.  Most individuals that are leaving substantial assets to their loved ones worry that by simply signing over these type of assets, they are straddling their loved ones with large estate taxes.  One valid option to minimize tax risk is to create a Family Limited Partnership.

Under a Family Limited Partnership, an individual can create a partnership and then transfer assets, such as a business, to the partnership.  For example, Oscar owns a chain of gourmet hot dog stands.  Oscar wants to leave his business to his two sons.  He decides to create a Family Limited Partnership as part of his estate plan.  Oscar then transfer’s his business to the Family Limited Partnership, meaning the partnership now holds Oscar’s business.  Oscar would retain control of the partnership. Overtime he would begin to transfer limited interests to his two sons. This does several things.  First, it allows his sons to begin learning how to take over the family business while limiting their potential liability. Second, when Oscar begins transferring assets to his sons in this manner, it helps minimize potential estate taxes.  It reduces tax liability by reducing the size of Oscar’s estate and by claiming discounts on the business valuation for lack of control and lack of marketability.  If you hold large assets that you plan on leaving to your loved ones, such as a business, investment portfolio, or real estate holdings, a Family Limited Partnership may be a smart option.

For additional reading:

An Asset Protection Trust

Selecting the Right Individuals to Oversee Your Estate

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