Family businesses, together with family farms and ranches make up a huge portion of the economy. They are both a source of pride for families and a source of economic stability, but passing a business from one generation to the next can be complex and difficult. These operations are long-term income generators that rely on good management with intimate knowledge of specialized operations. Creating a Family LP or LLC can be an avenue to reach succession goals, achieving a smooth transition of assets and management, reducing personal liability, and reducing estate tax burdens. In addition, like some of the other tools we have discussed, a Family LP can be used to convey assets without passing through probate. By focusing on “succession planning,” as an extension of estate planning, we consider the best way to smoothly transition assets and family businesses from one generation to the next.
A Family LP is a business entity, created by family members, as a holding company for business interests, real property, mineral interests, and other assets. There is great flexibility in the drafting and management of a Family LP. Because of their flexibility, Family LPs can be integrated with other aspects of an estate plan to achieve a variety of goals. The ownership interests can be held by a trust and distributed according to the terms of the trust. In the alternative, the ownership interests could be distributed directly to the family members upon creation of the Family LP.
Often, business and landowners desire a smooth transition of assets upon their death but are reluctant to relinquish management control of the assets and businesses during their lifetime. With a Family LP, the generation creating the LP can opt to retain full asset management control for as long as they desire. The founding family members can then gift limited partnership interests to those individuals they wish to inherit and run the operations after their death. In addition, other family members who will not take an active part in running the business can be granted interests. The limited partners will have an economic interest in the partnership but will lack the ability to control the assets held by the LP.
The Family LP can also be a way to reduce tax burdens for high value estates. Instead of the owners’ estate reflecting ownership of the assets themselves, the owners own an interest in a privately held company. A non-controlling interest in a privately held company is not considered “readily marketable,” so these interests usually receive a “discount” for estate tax purposes. Just like traditional limited partnerships or limited liability companies, the creation of the entity limits the liabilities of the individuals owning an interest and provides protection of the assets from creditors.
A Family LP can be a great way to get the younger generations involved and familiar with family assets and family businesses, while allowing the senior generation to retain management control, giving them time to ensure a smooth transition of assets and operations to the next generation. Contact us if you think your family may benefit from the creation of a family entity.
photo courtesy of Adlan at Unsplash.com
Don’t miss these other posts in this series…
Avoiding Probate: The Beneficiary Deed
Avoiding Probate: Revocable Living Trusts vs. Irrevocable Trusts