Family Limited Partnerships (FLIP) are a fast growing trend for protecting wealth. A limited partnership is a partnership that includes at least one general partner and a limited partner. Both partners contribute financially and share the profits. General partners actively manage the company, accepting unlimited liability for debts while limited partners do not actively manage in exchange for limited liability1. In a FLIP the parents transfer ownership of the family’s assets to children as limited partners in the company. Since the children can’t manage the assets, such as buy or sell them, it is relatively safe to transfer assets to minor or adult children. FLIPs are less complex than setting up a Corporation, but the daily operation of one is similar. The objective is to avoid the death tax by having a large estate to transfer to one’s heirs. When done with the guidance of a CPA assets can be transferred to children annually below the threshold of gift and other taxes. This can be done over a period of time, preferably while the children are still young.
Is it worth it to go to the trouble of establishing a legal entity for simply operating a household? Absolutely! Aside from the tax benefits it places you in the right state of mind. What state of mind is that? A Family is no different than a business. It has human resources and it his profit goals to fund its ongoing activities. There is a hierarchical structure and and an order of succession in the event something happens to one of the clan elders.
Turning the household into a business venture sets up the foundation for more successful living. Introducing budgets, cash flow analysis, and investment analysis creates discipline that can lead to better future outcomes. Saving or investing for college? That is no different than a company that has a continuing education program. Want to have a sail boat and enjoy your retirement on it? The boat is an asset and your retirement is the company pension plan.
There is a noticeable difference in the success of stock traders who treat their portfolio as a business rather than a personal investment vehicle or a hobby. Life is all about learning and building ones self. Using a structured organization such as a FLIP can be the basis for thinking outside the box when it comes to leading your family into a new prosperous era.
In the future we will discuss the useful actions your immediate and extended family can take with using a FLIP to reduce your costs and also help with your estate planning.
1. Kelly/McGowen BUSN 2009 Edition