John S. Stevenson, III, Esq.
© Musgrove Law Firm, P.C. 2014
In the Golden Days of Estate Planning, the living trust was the go-to vehicle for probate avoidance, asset protection and family gifting. With the current Gift and Estate Tax Exemption amount so high (currently $5.34 Million for an individual, $10.68 Million for a married couple in 2014), the Probate process in Texas has never been cheaper (assuming you have a valid will). When you take away the living trust’s ability to shield assets from a costly probate, it becomes a cumbersome, expensive device that provides little or no liability shield and that may deprive its beneficiaries of the valuable use of their assets.
If you are looking for an alternative to a living trust that adds liability protection or a flexible way to manage and protect business and personal assets and provide for family members, you should consider utilizing a Texas Family Limited Partnership (“FLP”).
An FLP is a business entity that consists of at least one General Partner and one Limited Partner. Typically, the General Partner is a Texas corporation or limited liability company that is responsible for all FLP management decisions, with the remainder of the partnership interests of the FLP held by family members that are Limited Partners.
As noted above, the main difference between a living trust and an FLP is that an FLP is first and foremost a business entity. Accordingly, the FLP and its General Partner have their own federal tax ID numbers (EIN’s), separate bank accounts under their EIN’s, and officers of the General Partner have the authority to act on behalf of the FLP. Accordingly, FLP business expenses are paid by the FLP, and the FLP should not directly pay for non-business expenses; instead distributions are made to each partner in proportion to their respective partnership percentages and the partners are able to dispose of such distributions for their own personal uses.
For those that may balk at the perceived business complexity of an FLP, you do not have to be Warren Buffett to run one, and the benefits of FLP ownership more than outweigh the costs, especially for high net worth individuals. The main benefits of an FLP are as follows:
- The FLP makes an excellent device for gifting. The FLP can gift a fractional limited partner interest to the next generation using the annual gift tax exclusion (currently $14,000) without writing a check to the recipient.
- Unlike most trusts, the FLP allows the FLP Partners the ability to retain both control and beneficial enjoyment of their assets.
- Under Subchapter K of the Internal Revenue Code of 1986, as amended, distributions from an FLP are not necessarily taxable to the recipients, as opposed to dividends of a traditional corporation. Instead, taxation is instead a function of allocating the actual taxable gains and income of the FLP to the partners based on their respective partnership percentages.
- With the exception of the General Partner, which by Texas law is jointly and severally liable for the obligations of the FLP, no partner has personal liability for the FLP’s debts and obligations. The shareholder of the corporate General Partner or the member of the LLC General Partner will not have personal liability beyond their modest initial capital contributions.
- The assets of an FLP are not subject to the claims of a partner’s creditors; under Texas law, the best a judgment creditor can obtain is a “charging order” against the partnership interest of a partner.
In summary, we do not recommend an FLP solely for tax savings purposes, however an FLP is an ideal entity to manage your investment assets, protect those assets and teach the next generation of your family the value of prudent asset investment and management. Please feel free to contact the Firm’s attorneys for a more detailed discussion.