2. FLP Defined
“A type of partnership designed to centralize family
business or investment accounts. FLPs pool together
a family's assets into one single family-owned
business partnership that family members own
shares of. FLPs are frequently used as an estate tax
minimization strategy, as shares in the FLP can be
transferred between generations, at lower taxation
rates than would be applied to the partnership's
holdings.”
3. FLP Explained Continued…
“An FLP is different from a conventional trust, as family
members actually own a share in a business. Shares can
be gifted to family members over years, thus taking
advantage of gift tax exemptions on an annual basis. The
assets held in an FLP impact the level of estate tax savings
that can be realized by using an FLP. In general, the more
illiquid and complex the asset mix, the more difficult the
FLP is to evaluate, and the larger the potential for estate
tax savings.”
5. How it works continued…
1. Parents legally form FLP. Business and assets transferred to FLP.
2. FLP issue GP and LP interests to parents
3. Parents retain GP interests but gift LP interests to children on
regular basis
Value of gift may include discount for lack of marketability and
minority interest
4. FLP purchases life insurance on both parents. FLP is owner of
the plan
5. Upon death of parent the insurance proceeds are paid to FLP
6. When should one use an FLP?
Want to transfer business to next gen without giving up
control immediately
Need to shift income to another family member in lower
income tax bracket
Need to make it difficult for creditors to seize assets
Want to protect assets transferred to children as a result
of a divorce
7. Important Points
General Partners have unlimited personal liability for
partnership debts
FLP must be formed for a valid operating business
FLPs may own marketable securities, real estate,
corporations, and insurance policies
Each asset in the partnership should be valued
separately
8. Primarily Marketable Securities
Pro rate NAV
Non voting shareholder
Discount
Decision making ability
Marketability
Closed end funds
Discount
Expenses to capital gain tax
Performance
9. Important Consideration
Professionally managed
Stringent Regulations by SEC
Diversification
Investment objective
Quality – Speculative vs Investment grade
10. FLP That own Primarily Real Estate
Valuation
Important Factor – cash flow
Discount
Lack of Control
Lack of Marketability
11. Secondary Market
1980 - Secondary market for limited partnerships developed
Three different types of participants
Market Makers – over the counter dealers
Exchanges
Buyers and sellers
Early years – limited information
Bi-monthly publication – Partnership Spectrum
Analysts able to calculate various valuation pricing
parameters
12. Secondary Market Continued
Secondary market serves as a reference point
for the valuation of privately owned FLP’s
Similar to:
Publicly traded common stock market –
privately owned companies
Most of price-to-value discount in secondary
market is due to lack of control
17. Lack of Marketability
Empirical analysis
The liquidity and volatility
Income potential and distribution policy
Management
Term of partnership agreement
Quantitative analysis
Primary Methodology
Corroborative methodology
18. Quantitative Marketability Discount Model (QMDM)
Assumed growth rate
Assumed income generation of the FLP’s assets
Expected duration or holding period
19.
20. The Needs of FLP(Agreement) 1
Family businesses have longevity
About 40% of U.S. family businesses turn into second-generation
businesses, approximately 13% are passed down successfully to a
third generation, and 3% to a forth or beyond.
Due to the events: bankrupt, retirement, death, divorce etc.
The average life span of a family business is 24 years.
21. Family business have issues about their sustainability
76% of small business owners did not have a
succession plan in place.
31% did not have any mechanism in place to
resolve the dispute.
http://www.startupbuildupsellup.com/category/family-businesses/
The Needs of FLP(Agreement) 2
22. The Role of FLP (Agreement)
A family business agreement can
Mitigate against the likelihood of a major disputes
causing irreparable damage to the business
Ease tensions between family members
Make the transition from one generation
to the next more successful.
http://www.startupbuildupsellup.com/category/family-businesses/
23. Purpose: Family Business Valuation
Allocating the value of the family business for
tax reporting and financial statement purposes
Providing values of assets to bankers and for
insurance purposes
Providing correct values of assets for real and
personal property taxes
Estate and retirement planning purposes
Buying /Selling all, or a part, of the family
business
Source:
http://www.business-solutions-and-resources.com
24. FLP Document Checklist
(Just being formed)
The final agreement (the written document)
Documentation of the assets
Valuation of the assets
Balance sheet
Pro forma / income statement
The general partner’s policies
25. FLP Document Checklist
(Ongoing)
The same information of just being formed
Partnership income tax returns
The history of distributions made to partners
Information about any transfer of partnership
interests
26. Interpreting the Partnership
Agreement 1
Business Purpose
- Description of the valid business purpose
Contributions
- Capitalization of the partnership
Management Prerogatives
- Management responsibilities and authority
Distributions to the Partners
- Discretion of the general partner
27. Interpreting the Partnership
Agreement 2
Control and Lack of Control
- The percentage ownership of the company , right to control
Transferability of Family Limited Partnership Interests
- A provision restricting transfer of an FLP interest
Dissolution / Liquidation
- Several events will cause the dissolution of the partnership
(the designated term, death, bankruptcy etc.)
Editor's Notes
Real estate can include unimproved land, office buildings shopping centers, residential properties, warehouses and agricultural land. Basically income producing and non-income generating property.Imp – cash flow to FLP partnersValuation method? – by qualified real estate appraisersNAV calculated and discounted based on lack of marketability and control
Publication provided fundamental and operating financial information on hundreds of partnerships and lot more. Result – increased availability of information
The more steady, safe, and predictable the cash distribution level, the lower the discount from NAV required by investors.
