Most business owners want a smooth transfer of wealth and protection of assets, especially when generational concerns are at stake.  However, few consider the exit strategies years or even decades in advance when it’s most opportune to take advantage of tax law.

One challenge faced by family-run businesses involves transitioning both the ownership and operations from one generation to the next. A family limited partnership (FLP) is a legal agreement that enables business owners and their heirs to address succession, estate, and tax planning needs all at once.

Business owners who want family members to inherit their businesses in the future could use FLPs to transfer assets out of their taxable estates during their lifetimes. And to do so, the owners of a valuable business might begin this process many years before they intend to give up operational control.

Estate tax threat

The IRS calculates the estate tax due on an individual’s gross taxable estate by adding the value of all owned assets, including a home and a business, and subtracting any applicable exemptions. Even if the taxable estate falls below the current generous federal estate tax exemption level ($13.61 million or $27.22 million for a married couple in 2024), the family might not be entirely out of the woods, especially if they live in a state that has an estate tax or an inheritance tax with a lower exemption amount. Perhaps more concerning, the federal estate tax exemption is scheduled to revert to lower, inflation-adjusted 2017 levels in 2026.

When business owners fail to consider that federal and state estate taxes could be due upon their passing, the funds needed to pay the taxes may not be available, and their heirs may be forced to borrow the money or liquidate the business.  We see it every day, a business owner’s liquidity or wealth is tied up in the business.

Family discount

With an FLP, general partners run the business. Limited partners (such as the children of general partners) have no vote and no say about day-to-day operations, and they are not liable for the debts of the FLP.

A general partner (or a corporation or limited liability company controlled by the general partner) can gift ownership shares to limited partners in installments that conform to the annual gift tax exclusion of $18,000 per recipient (in 2024). Because limited partners have restricted rights, these annual gifts may be valued at a discount — typically 30% or more — from fair market value. For example, more than $25,000 worth of property or business shares (currently valued at $18,000 for gift tax purposes) could potentially be transferred to each limited partner without triggering gift taxes. Of course, every family’s situation is different, and actual results will vary.

As you can see, an FLP offers an optional framework for wealth transfer, asset protection and tax efficiency.  By leveraging an FLP, you retain control over your business while ensuring a smoother transition of assets to future generations.  If you are considering setting up a family limited partnership, know that it can involve complex tax rules and regulations, and there are up-front costs as well as ongoing fees and operating expenses to consider. Please consult with your legal and financial team to tailor this type of partnership for your family and business needs and safeguard your legacy.

In the Word

Honor the Lord with your possessions and with the first produce of your entire harvest.

Proverbs 3:9

There is no doubt about demonstrating the importance of prioritizing God in our financial lives. By offering our firstfruits—our best and first portions—we show Him honor by placing our trust and faith in Him.
Honoring God with our wealth involves much more than mere giving; it reflects our heart’s attitude towards Him. It means recognizing His sovereignty and expressing gratitude for His blessings. When put God first in our finances, we trust in His provision.
This principle encourages us to evaluate how we manage our resources. Are we giving generously and sacrificially, or are we holding back? By dedicating the first and best of our income to God, we align our hearts with His will, inviting His blessings into every aspect of our lives.

 
Schedule Meeting


Sources: Broadridge Investment Management Solutions

Stone Oak Wealth is regulated by the SEC as a registered investment adviser. Please see visit Legal Disclosures for additional advertising disclosures.