Limited Partnerships: General & Family Partnerships

Compared to Family LLC, Ultra Trust, Medallion Trust,
Vertex Trust, Foreign Trust, Private Banks

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Traditional Limited Partnerships & Family Limited Partnerships: Pros and Cons. A Look at Other Trusts, Foreign Deferred Compensation & Private Banks

The concept of a trust was first used in Anglo Saxon times and is a contractual arrangement whereby property is transferred from one person (The Grantor) to another person or corporate body (The Trustee) to hold the property for the benefit of a specified list or class of persons (The Beneficiaries).

Traditional Limited Partnerships

Traditional Limited Partnerships have been OVER-MARKETED as wealth transfer devises. Family Partnerships are RED FLAGS for the Internal Revenue Service for abusive tax-free WEALTH TRANSFERS. General Partners of Family Partnerships are exposed to frivolous lawsuits, court judgments, and creditor seizures. The problem is avoided if the FAMILY, LLC is the General Partner or the Family Limited Liability Company (FLLC) is substituted for the partnership.

What’s a Family Limited Partnership? (FLP)

How assets are transferred amongst family members

A Family Limited Partnership is a standard partnership which includes only family members. Thus, the word “Family” Partnerhip. As in traditional partnerships, there’s a General Partner and Limited Partner. With the FLP, the parents are the General Partners, retaining 100% control over the assets and 100% of the liabilities from a potential frivolous lawsuit.
The children as Limited Partners, are the silent partners with no control over the assets and no liabilities in case they get sued.
Family partnerships have been widely over marketed as the “devise of choice” for transferring the “family business” and other highly appreciated assets tax-free from parents to their children.
How it works: The older generation (parents) become 2% owners as “General Partners” in a Family Limited Partnership. Over a period of time, by “gifting” limited partnership interests, the children own 98% as limited partners.
End result: Highly appreciated assets are effectively transferred from the estate of the “parents” taxable @ 55% plus state taxes, to the children ” tax-free.”
The IRS considers these arrangements “abusive” when overzealous practitioners “over-claim” two commonly used discounts in the valuation of underlying (highly appreciated) assets in Estate Tax Valuations. The IRS comes down significantly hard when these arrangements are made over a “death bed.”
The two valuations are:

  1. Lack of marketability discounting, typically 15% to 35% due to a limited market for the business or the assets.
  2. Limited minority interest discounting, typically an additional 15% to 35% due to the minority position in the business or underlying assets.
Combined, these two discounts can amount up to 70% or even more. How much, is too much?
Example of the ABUSE:

You and your spouse own a piece of commercial real estate with a Fair Market Value of $2million.
You and your spouse, “gift” (98%) of your real estate to the Family Limited Partnership (FLP) to your children as Limited Partners while retaining (2%) as the General Partners. Please note: as General Partners, you have retained 100% control and all the potential liabilities.
Certain Practitioners – The IRS comes down hard if the arrangements are made over a ‘death bed’, so why wait? Promoters will have you believe that you have “just reduced” your taxable wealth by up to 70% or more of it’s value? From $2million down to $600,000 or less, while retaining 100% control?

The problem with limited partnerships

The disadvantages of the Family Limited Partnership:

  1. Gifted property does NOT receive the “stepped-up” basis treatment that bequeathed property receives. Therefore the children, who have received “gifted partnership interests” may face unexpected capital gains tax liability.
  2. General Partners are not insulated from potential lawsuits, judgments, or creditor seizures. This problem can be avoided if the General Partner is The ULTRA TRUST? or the FAMILY, LLC is used, in lieu of the Family Limited Partnership.
If you have an interest in FAMILY BUSINESS SUCCESSION PLANNING, please contact us, there are several available devises addressing the following important issues:

  • Ownership. Which of the FAMILY members will become the future owners of the business? What method or combination of financially engineered methods is the most effective in consideration of asset/wealth preservation, elimination of probate, deferral of capital gains taxes, elimination of estate taxes, and reduction of earned income taxes.
  • Control. Which of the FAMILY members will become the future managers. Not all FAMILY members have management skills.
  • Dispute resolution. How will FAMILY members deal with potential disputes? What mechanism is fair to controlling and non-controlling FAMILY members.
  • Employment. Which FAMILY members will be employed by the business?

Better asset protection/wealth preservation

What’s a Trust?

We have a number of asset protection / wealth preservation strategies, elimination of probate, elimination of estate taxes, and other devises for deferring possibly reducing your income taxes.
The ULTRA TRUST? meticulously crafted and financially engineered to hold your personal residence and all your other valuable assets with NO downside to your personal income tax return, form 1040 while insulating you from potentially damaging lawsuits.
The MEDALLION TRUST? designed to implement your Gift Tax / Unified Estate Tax Credit LOOPHOLE of $675,000 or $1,350,000 jointly with your spouse.
The VERTEX TRUST? for your deferral of Capital Gains Taxes, elimination of probate and all inheritance taxes while insulating you from potential frivolous lawsuits.
The Family Limited Liability Company (FLLC). A much stronger financial devise than the partnership. There are there are NO General Partners with the Family Limited Liability Company (FLLC). General partners of a Family Limited Partnership have NO asset protection.
The Foreign Deferred Compensation Plan defers “earned income” taxes on W-2 income or other (((income streams))) rents, commissions, royalties, day-trading, etc.
The Foreign Private Bank properly capitalized, “class A” foreign bank is the equivalent to Fleet, BankBoston, BankAmerica. Anything that they can do, your Class “A” Foreign Bank can do. Practically a license to printing your own money. Not available to IRS defined US Persons.
Category: Irrevocable Trust

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