Working with family members can have a lot of benefits. There is a specific type of business structure available to families that can help them with their business and with estate planning, called a family limited partnership.
It used by the family to pool their financial resources and can help them achieve goals that might not otherwise be possible individually. The partnership can hold assets like investments, real estate and cash.
There are two types of partners, general and limited. General partners are responsible for the day-to-day operation of the business. They are paid according to the partnership’s operating agreement, which may pay them from part of the profits or with an annual salary.
Limited partners contribute money in exchange for ownership in the project, but are not involved in executive functions. If they are, they could risk losing their limited partner status.
Asset protection benefits
With a family limited partnership, wealth may be passed on to future generations with tax protections. Each year, individuals can gift family limited partnership interests tax free to other individuals, up to the annual gift tax exclusion amount. Currently, the gift exclusion is $15,000 for individuals and will be raised to $16,000 in 2022.
The children and grandchildren of the partners can benefit from interest, dividends or profits generated from the partnership. The general partners can set rules in the partnership agreement to protect these amounts from misuse or mismanagement. For example, they can require that the assets cannot be gifted or sold until the beneficiaries reach a certain age.
If a family is interested in forming a family limited partnership for asset protection purposes, it’s important that it is completed correctly.