Forming a family limited partnership can lower taxes | SummitDaily.com
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Forming a family limited partnership can lower taxes

Bob Priest

Dear Mr. Priest: My attorney has encouraged my wife and I to form a Family Limited Partnership. To be honest, I can’t understand any of the legal mumbo jumbo explaining how it works. I think I have a general understanding, but I was wondering if you could give a simple explanation. I think it is important for your readers to at least know it exists too.

– Patrick, West Vail

Dear Patrick: You’re not alone when it comes to interpreting legal documents. However, I do think it is important to develop a relationship with an estate planning attorney who can explain concepts clearly so that you can understand them. I’ve taught estate planning seminars in various cities and states, and the criteria I use when evaluating attorneys includes not only their professional experience, but also their ability to relate to clients. Sometimes it is more difficult to find the latter quality than adequate professional experience.

A family limited partnership can be a wonderful tool for the right situation.You should be working closely with your estate planning attorney, certified financial planner, and certified public accountant on such an issue. Generally, the idea behind a family limited partnership is threefold. First, it can allow wealth to efficiently pass to future generations. Second, it creates a means to reduce the size of one’s estate to minimize estate taxes. And last, a family limited partnership can provide a person with a vehicle to retain management of certain assets while transferring ownership to other family members. Keep in mind that a family limited partnership must have a legal business purpose.

An easy explanation of a family limited partnership is contained in the concept of synergy. With a synergistic relationship, the combined effect of two or more forces is greater than the sum of their individual effects. For example, in today’s drought environment, a team of firefighters is more effective than the same number of individual firefighters acting alone. This is synergy. Take the same principal and apply it to a business with a general partner and several limited partners. The overall business may be a very valuable entity, but when you look at the individual limited partners, their value is diminished because they cannot act alone in the decision-making process and their individual shares are not as marketable as the whole. This concept allows the parents (general partners) to give pieces of their business to their children (limited partners) at a discounted value. Remember, beyond certain minimum levels, gifts are taxed to the person giving them. Therefore, since the pieces of the business are discounted (sometimes as much as 25 percent to 40 percent), the parents pay less gift taxes. An additional benefit of this gifting is to reduce the size of the parents’ taxable estate so that when they pass away, the children pay less in estate taxes. For example, gifts of $1,000,000 in the form of limited partnership shares in a business (assuming they are discounted at 25 percent) could result in $250,000 being exempt from gift taxes, while decreasing the size of the donor’s estate by $1,000,000. Therefore, by forming and properly funding a family limited partnership, the parents may have effectively minimized gift tax transfers, reduced the size of their estate, and simultaneously retained management and control in regard to the family business.

Bob Priest, MBA, CFP, is an independent certified financial planner and registered investment advisor serving Summit, Eagle, and Front Range residents. Bob Priest Financial, Inc. specializes in tax-advantaged investments, asset management, and fee-based financial planning. He can be reached at (970) 513-7077 or visit his Web site at

http://www.BobPriestFinancial.com. All opinions herein are those of the author and not that of the Summit Daily News or its staff. Submit your financial questions to Bob@FinancialCompanies.com.


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