Introduction
Last month, we went over the good side of creating an FLP or Family Limited Partnership. This month, the Disadvantages and Conclusion to the article are discussed.
Disadvantages
Along with the advantages, there is a substantial downside, that downside is a substantial list of ways to derail the intent of the FLP and the advantages it sets forth.
1) Many promoters of the FLP actively encourage people to insert nearly all of their personal property into the FLP. Property included in the transfer typically includes their house, business interest, recreational property, and any and all possessions. Including all personal property in the FLP, to the point where it is impossible to be financially viable is often fatal to the instrument. This is the worst possible thing that could be done. The IRS sees right, through it, brings it to court, and oftentimes, wins easily.
2) Failure to follow formalities is another fatal event to the FLP. Corporate structures, such as corporations, LLCs, S Corporations all have requirements on their formalities. Such formalities include a charter of some sort, minutes, elections, and etcetera. Failing to have or follow the charter and rules is a sure way to give the structure less credibility within a court or other state proceeding. It is nearly universal that those holding a corporation or FLP will not exactly follow the procedure necessary to uphold the use of the corporate entity or it’s like. It is with this many FLPs fail and leave the owner with a large tax bill.
3) Forming the Entity, but placing nothing in it is another folly that is common. Many individuals go to great lengths and expenses to form an FLP, a lot of times they form very proper, well utilized entities in fact. The downfall is sometimes that they do not place sufficient assets in the FLP. This is also common with trusts that are written up by attorneys. Once the instrument is created, you must put assets in it, otherwise the instrument is of no use and the assets outside the entity do not benefit.
4) Failing to maintain the FLP can also mean the downfall of the entity. Each state has a mandatory fee for every entity registered within its borders. This includes corporations, partnerships, and all other entities. The FLP is no different in they must pay a fee. If this fee is not paid, eventually the entity is administratively and involuntarily dissolved. The result, no FLP benefits.
5) Jurisdictional Issues can also present problems. In any legal or tax strategy it pays to know the jurisdiction. From a legal perspective bankruptcy laws differ, as in some states offer only a charging order to creditors trying to collect from Limited Partnerships. A charging order allows creditors to accept distributive payment instead of collecting the principal and assets of the company. It is a less preferred method of collection to the creditor. If states do not allow charging orders, this is less favorable for an FLP. Discounts are also imperative.
Conclusion
Estate and business succession should not be done in a one size fits all concept. While the Family Limited Partnership has its place for certain individuals, most people would benefit from other or additional estate planning. The fact is only 25% of those doing estate planning should have an FLP. Trusts, business planning, and a whole host of other instruments are available to properly plan the actions and courses to be taken when the time comes. The time to engage in business succession planning is today. Don’t let your business become yet another statistic. Call the professionals at The Center for details and assistance with your business succession plan and estate planning.