A sophisticated farm transfer strategy that re-organizes the family farm into a business entity with two classes of ownership – voting and non-voting – is the family limited partnership. The FLP can solve a host of difficult planning problems for the large family farm, but it is a complex planning tool requiring a skilled team of professional advisors to implement and a commitment by the farm owner to follow through on implementation.
A primary advantage of the FLP is the “freezing” of your estate value by transferring farm wealth (sale or gift) to children in the form of limited partnership units. A limited partner has a legal right to partnership equity, but has no management or voting rights. The farmer retains full ownership of the general partnership interest, which controls 100% of the partnership assets and makes all business decisions. Often, the GP interest represents just 1% of the value of the partnership. Maintaining full control is important when the farmer is concerned about children at risk of a future divorce, creditor problems or who may never prove able to run the farm business.
The FLP is effective at reducing the taxable estate of the family farm. Due to restrictions on the limited partner’s ability to sell their partnership interests and their non-voting status, the transfer tax value of the partnership interest can be discounted significantly from the market value of the underlying partnership assets. In addition, gifting partnership interests will shift farm income to the children at lower income tax rates.
However, the FLP must be run as a legitimate family farm business or the IRS can disallow the income and estate advantages.
We understand the advantages and disadvantages of the FLP strategy and can serve on your advisor team to help you through the planning process.
