“I’ve been looking at various strategies for investing for and with my kids. I’m currently considering Real Estate investments.” This was also on my brother Luis’s mind earlier this year. He’s an Army veteran who became a real estate investor during his time in the Army. Now, Luis wants to invest with his children. He has twin daughters in college and a son who owns a marketing company. To help Luis reach his goal, I found that a Family Limited Partnership is a terrific financial vehicle for him to consider.
If Luis creates a Family Limited Partnership (FLP) under state law, he can transfer assets to his children with very favorable tax consequences. By setting up an FLP, he can use exclusions and valuation discounts to his greatest advantage.
Here’s how it works. Luis can transfer appreciated real estate into the FLP. By doing this, he becomes a General Partner in the FLP. Luis retains responsibility for both liabilities and management. Next, Luis can make his children limited partners. They’ll enjoy a passive interest and limited liability. These are the basic steps of how Luis can transfer his real estate assets to his children.
There are three core advantages for Luis forming an FLP. First, Luis will own and manage the entity, but his children do share in ownership. With the FLP, there will be no income or gift taxes when transferring assets to his children. Second, Luis can discount the value of assets from their Fair Market Value if he so chooses and there’s a financial upside in doing so. Third, the FLP provides financial shields. It blocks creditors and liens from claims against his children. It also protects assets against divorce claims.
Here are four of the disadvantages to consider when forming an FLP. First, there are attorney fees and other set-up costs. Second, valuation costs, much like appraisal fees, can be high. Third, operation requirements and compliance can be somewhat burdensome. Last, the IRS might challenge valuations and discounts on assets transferred. So, it’s always best to obtain the guidance of experts in setting up and maintaining an FLP. You’ll save money in the long run.
As it’s been for my brother, an FLP might be the perfect solution for you for transferring assets to your children. It will allow you to control and protect assets as a general partner.
As I close, it’s hard to believe this is my last article for 2022. I wish you and your family a Merry Christmas and a Happy & Prosperous New Year!
Please let me know if there’s anything I can do to help you with anything related to this month’s topic or with making strategic year-end financial decisions. I’d be happy to have a conversation with you.
If you already have an investment advisor, congratulations. However, if you’d like to learn more about what non-commission, fee-only investment advisors do for their clients, don’t hesitate to contact me at empiriKalpartners.com for an individual assessment.
About the Author
Edward Vela is an Investment Advisor and Estate Planning Specialist at empiriKal partners, llc©, with 15 years of wealth management experience. He earned a Journalism Certification from the University of Massachusetts, a BA in Political Science, a Financial Planning Certification at UCLA, and an MBA from the UCLA Anderson School of Management. You can contact Edward at 925-300-8805 or email edward@empiriKalpartners.com.
