Some people are under the impression that establishing a family limited partnership can somehow eliminate all estate taxes, regardless of the fact that the estate or the overall structure of the business.
The concept behind this is that the parents can transfer property into a partnership business entity with children and potentially grandchildren. These individuals will share ownership as limited partners. The parents hope that this partnership will then be used to transfer assets to a younger generation tax-free.
However, in order for a family limited partnership to be effective, the IRS has to be effectively convinced that the limited partnership has a purpose beyond reducing estate taxes.
Renaming your stock investments or a home as a family business doesn’t make them one. However, if you do have a real and established business, there can be significant estate tax advantages to creating a family limited partnership, and this should only be done under the guidance of an estate planning attorney.
A family limited partnership is only operational and helpful when you have an attorney who knows how to set this up properly. A lawyer can help you explain what it means to set up this partnership and what’s required in order to maintain it.
Creating a limited partnership for you real business can allow you to transfer minority interest to future inheritors. The pros and cons of this approach are something you should discuss directly with a lawyer who is very familiar with all aspects of estate planning.