Section 10.5 Formation of the Family Limited Partnership or Family Limited Liability Company

• Library: Estate Planning 2013 Supp

D. (§10.5) Formation of the Family Limited Partnership or Family Limited Liability Company

In forming FLPs or FLLCs, several issues should be considered.

If an FLP is to be used, careful consideration should be given to who will act as the general partner of the FLP. In the FLP form in §10.9 below, an LLC will act as the general partner. But in a typical FLP, the parents can act as the general partners, or their revocable living trusts can act as general partners. There are concerns with the parents (or their revocable trusts) acting as the general partners of the FLP. Having parents (or their revocable trusts) act as general partners could cause problems under:

I.R.C. § 2704(a) (lapse of liquidation or voting rights);

I.R.C. § 2704(b) (a continuation provision in a partnership agreement upon the death of a general partner could be viewed as an “applicable restriction”); or

I.R.C. § 2036(a)(2).

Further, having parents (or their revocable trusts) as general partners removes the possible nontax reason of using the FLP to shield against liabilities associated with contributed assets.

If a separate LLC is used to act as the general partner of the FLP, additional issues arise as to the ownership of the LLC and the management of the LLC. With respect to those issues, the planner may want to review the risk of the applicability of § 2036(a)(2). Typically, the parents will want to act as the managers, but the LLC could be managed by a “board of managers,” on which both the parents and the children serve as managers. Likewise, the children could own membership interests in the LLC.

If the planner contemplates the use of both a “managing” general partner and an “administrative” general partner (these terms are more fully explained in §10.4 above), the planner may want a separate corporation or LLC to act as the “managing” general partner, and the planner could consider naming the parents (or their revocable trusts) as the “administrative” general partners.

If the FLLC is to be used, typically the parents will act as the managers of the FLLC.

Children may or may not be initial partners or members in the FLP or FLLC. For example, the parents alone may form the FLP or FLLC as the sole partners or members. The parents then transfer assets to the FLP or FLLC in exchange for all ownership interests in the FLP, the parents (or perhaps an LLC controlled by the parents) will receive the general partnership interests, and the parents (or their revocable trusts) will receive...