One estate planning tool a private landowner can use to minimize gift and estate taxes is the family limited partnership (FLP). A FLP is a type of partnership that is closely held, only family members can acquire interest in the partnership and its assets. Partners generally share the liability and profits of the partnership. However, the management and voting structure can be modified to fit the partnership goals.
A FLP can be a good management tool for transferring large parcels of property to multiple people. The donor of land, such as a parent, can transfer title of their land to the partnership. Transfer of property into the FLP is not generally taxable as a loss or gain to the donor. However, there must be some underlying reason for creating an FLP, instead of being for the sole purpose of avoiding taxes, and it cannot be formed for investment purposes. A valid purpose might include to better manage a family farm, ranch or forest and ensuring sound business decision regarding family owned property.
Donees, such as children, can be transferred interest in the property through shares in the partnership. Donees receive a valuation discount for the partnership interests they acquired. Put simply, this means that the partnership interest is of less value than the land the interest represents (because it restricts the use of the land), thus the gift tax will be less than the fair market value of the land.
If the donor is designated the general partner, they can maintain control over the property and the business. This way a parent can continue to live on their property and run their business. However, children can be included in the decision-making process as partners depending on the formation of the partnership and family dynamics. If a child does not want to have anything to do with the land, they can be bought out by other siblings.
Most importantly, forming a FLP ensures that your property can remain whole. By transferring your property using this tool you are making sure that all of your children can be taken care of, that your business will remain viable and that your property will not be subdivided or developed.
It is important to seek legal assistance when considering whether to form a FLP. See the YellowPages for professionals near you! A professional will help determine if a FLP is right for you and your land. Another option to consider is forming a limited liability company (LLC) to minimize liability and taxes.