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					FAMILY LIMITED PARTNERSHIPS

1. WHAT IS FAMILY LIMITED PARTNERSHIP?

A Family Limited Partnership is an entity, like a corporation. It is used to protect assets and keep
them in the family. A certificate is filed with state authorities to bring the Partnership into
existence. The Partnership has distinct identity and tax identification number. It can own assets
and can conduct most activities that can be conducted by an individual or a regular corporation.

2. WHO OWNS A FAMILY LIMITED PARTNERSHIP?

Partners own it. General Partners have a percentage of ownership and can generally control and
manage the Partnership. They can make investment decisions and decide when and how much
to distribute to Partners. A General Partner can be held responsible for any liabilities that the
Partnership may have. Limited Partners have a percentage of ownership but have no voting or
management participation rights. A Limited Partner should not have personal liability for any
activities of the Partnership, much like a shareholder in a corporation is protected from any
corporate liabilities.
Typically, for example, a father would put assets into a Family Limited Partnership. He would
own, say, 50% of the Partnership as General Partner. He could then gift 50% of the Partnership
to his children by giving them Limited Partnership interests. He would thus control the
partnership, but 50% of the assets and all income and growth thereon would be owned by his
children.

3. WHY IS A FAMILY LIMITED PARTNERSHIP A PREFERRED STRUCTURE FOR
INTRAFAMILY GIFTING AND OWNERSHIP?

There are many advantages to using Family Limited Partnerships. These advantages include:

#1 Controlled Distributions

The General Partner can control the Partnerships and its distributions. Income and profits from
the Partnership do not have to be distributed; they can be reinvested.

#2 Restrictions

Limited Partners can be restricted from transferring, selling or otherwise "losing" their ownership
interest.
#3 Valuation Discounts

A discount can be used in calculating the value of Limited Partnership interest given to family
members. For example, a 10% interest in a $1,000,000 Limited Partnership may be valued
substantially less than $100,000 for gift tax purposes. Gifts of Partnership interest can qualify for
the $10,000 per year annual exclusion if structured properly.

#4 Creditor Protection

A certain degree of a creditor protection is inherent in owning interest in a Limited Partnership. A
Limited Partner's creditor(s) cannot directly levy upon Partnership assets and cannot "take" a
Limited Partner's interest in a Partnership. Current law only allows for a "charging order" which
requires that any monetary or financial distributions from the Partnership to a particular partner be
given to that Partner's creditor(s). The response to such an order can be that the Partnership
simply reinvests earnings instead of making distributions.

#5 Arbitration to Settle Disputes

A Family Limited Partnership Agreement can provide an arbitration provision to resolve any family
disputes among Partners. The Partners simply agree in advance to have any disputes resolved
by arbitration. The use of arbitration can avoid unwanted publicity or a possibly negative outcome
in a jury trail that could otherwise be used to resolve disputes.

There can also be a provision in the Partnership Agreement whereby a Limited Partner who
brings an unsuccessful arbitration action against a General Partner would bear all costs of
arbitration. This type of provision deters Limited Partners from bringing any frivolous or harassing
actions against the General Partner.

#6 Buy-Sell and Right of First Refusal

A Partnership Agreement can include buy-sell and right of refusal provisions to prevent unwanted
persons from becoming Partners. A buy-out provision can provide that Partnership interest may
be bought by other Partners or the Partnership at fair market value or at a discount.

#7 Asset Protection in the Event of Divorce

In the event a Limited Partner has a failed marriage, the Family Limited Partnership can be
structured to protect assets and keep them in the family. The Partnership can be used as a
means to segregate the spouse's property. Most courts are reluctant to award a Partnership
interest to the other spouse in a divorce proceeding. In the event that the court does award a
Partnership interest in a divorce proceeding, such events could trigger a by-out provision which
would enable the Partnership interest to remain in the family.

#8 Flexibility

Unlike an Irrevocable Trust, a Family Limited Partnership can be very flexible. A Family Limited
Partnership may be amended or terminated if all of the members agree to do so.
#9 Reduced Costs

Placing all assets into a Family Limited Partnership can reduce administrative costs. There are
less costs involved with placing all family assets in a entity or trust than placing assets in several
or trusts.

4. HOW CAN I BENEFIT FROM "MINORITY DISCOUNTS" ON GIFTS?

Family Limited Partnerships are excellent gifting vehicle because children or beneficiaries can be
given Limited Partnership interest that restricts their right to participate in management or
financial decisions. The IRS has allowed "minority discounts" of up to 40% on Limited Partnership
gifts due to their lack of control and marketability.
The impact of these discounts can best be illustrated by example. Assume that John Doe has
$1,200,000 in assets, three children, and will live until 2005. Upon his death, assuming that no
Family Limited Partnership was established, John's estate would incur an estate tax of $235,000
and $965,000 would go to his beneficiaries.
Using a Family Limited Partnership, assume that John gifts $50,000 per year to the Family
Limited Partnership for 10 years. With the 40% "minority discount", John can gift assets worth
$50,000 per year into a Family Limited Partnership for the benefit of his children while only using
$30,000 worth of annual exclusions. Using a Family Limited Partnership removes $500,000 plus
any future growth on these assets from his estate. Upon his death, the estate tax would be
$37,000; a savings of almost $200,000!
Minority discount estate tax savings can be even more drastic if a client can gift all or part of their
$1,500,000 unified credit. For instance, if one was able to gift $1,000,000 to a Family Limited
Partnership and take a 40% minority discount, the gift would only use their $600,000 unified credit
while removing $1,000,000 of assets, plus any appreciation thereon, from their estate.

#5. HOW IS A FAMILY LIMITED PARTNERSHIP TAXED?

A Family Limited Partnership is typically taxed like a regular partnership whereby all income and
deductions flow to the partners pro rata, based upon their Partnership interest. This can be
altered by agreement, and certain tax laws may effect the income and deductions that flow
through to each Partner.
The Partnership must file tax returns with the Federal Government and distribute K-1's to the
individual Partners so that their share of the income and deductions of the Partnership can be
shown on their individual 1040's.
Unlike a regular corporation, there is no tax imposed on a Limited Partnership and, unlike an S
Corporation, there is generally no tax when assets are conveyed from the entity to its partners.
Limitations that apply to S Corporation ownership do not apply to Family Limited Partnerships.

#6. WHAT ARE POSSIBLE COMPLEXITIES THAT SHOULD BE ADDRESSED BY TAX
ADVISOR

Some of the complexities that must be addressed when establishing a Family Limited Partnership
include making sure that the Partnership Agreement is carefully drafted so the Partnership is
qualified as such under Federal tax law, and that income and expenses of the Partnership are
properly allocated between the General and Limited Partners. The General Partner must also be
"adequately capitalized" according to state creditor law regulating partnerships can be
significantly more complicated than other areas of Federal tax. It is definitely advantageous to use
proper planning to avoid potential tax complications.

#7. WHAT DOES IT COST TO FORM, FUND AND MAINTAIN A FAMILY PARTNERSHIP?
Formation and maintenance costs are minimal compared to tax savings and overall security. In
addition to legal fees, there are state registration fees. Speak with your Financial Advisor or
Estate Planning Attorney for an estimate given your unique situation.

#8. IS A FAMILY LIMITED PARTNERSHIP RIGHT FOR ME?

A Family Limited Partnership is an excellent way to remove a significant amount of assets from
your estate while retaining control of those assets. Family Limited Partnerships can be flexible
and provide a means to keep assets in the family.
How can a Family Limited Partnership help your family? Assume that a father sets up a Family
Limited Partnership. He is a General Partner owning 1% and a Limited Partner owning 90%, and
both of his children own 4.5%. The following protections can apply:

1. If the father is sued, creditors cannot seize Partnership assets (assuming that the Partnership
was set up before any creditor problems began).

2. If a child gets divorced or is subject to creditor claims, the divorced spouse or creditor (s)
cannot obtain Partnership assets.

				
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