For most families with high net-worth, wealth preservation is a key concern. As tax laws and financial regulations shift, many families use special financial instruments to retain as much of their assets as possible.

One such instrument is a family limited partnership (FLP) – but the rules governing FLPs could be facing major changes. If you have an FLP or are thinking about using one, it is important to look at your options.

How the Family Limited Partnership Works

An FLP pools multiple accounts into a single family-owned business. Members of the partnership each have shares, which can be transferred to different members of the family with a much lower tax rate than through ordinary means. The ownership of shares is what sets FLPs apart from a traditional trust. By gifting shares, families can effectively discount the true value of the asset, anywhere from 25% to 40%, which makes the taxes much lower than by other methods of transfer. The potential tax savings can be significant.

Many families use FLPs not just to transfer wealth, but also to create estate tax savings. When an FLP is complex or contains assets that are difficult to liquidate, the value becomes complicated to evaluate, which could potentially lower the estate tax impact.

Impending Rule Changes at the Treasury

The U.S. Treasury’s point of view, however, is that FLPs are “gaming the system” and an abusive practice.

The Treasury is finalizing regulations that will impact FLPs and possibly other wealth transfer vehicles. Though not guaranteed, these regulations are expected to go on the books in mid-September.

Though officials have not revealed specifically what changes will be made, many are expecting certain tax loopholes to close for FLPs formed after the new rules. It is highly unlikely that any regulation changes will be retroactive, so some families are setting up FLPs now to lock in their advantages.

Interested in Learning More About FLPs?

Want to know more about FLPs? We can help you stay informed of this and weigh your options. PDM’s tax experts can help advise you on the best course of action. Contact us; with our years of technical experience, advanced training, and cutting edge technology, we are your financial partner.