Estate Planning | Family Limited Partnerships in Minnesota

Family Limited Partnerships in Minnesota

Family-run businesses are an excellent means for parents to leave a legacy for their children. Although simple in concept, passing a family run business down to children or grandchildren can present unexpected pitfalls. Increasingly, many small businesses are using business associations to accomplish estate-planning goals. Partnerships are a business entity useful for estate planning. Although newer to business law than corporations, partnerships offer parents seeking to pass a business down the benefits of flexible management and one level of taxation.

Partnerships, particularly limited partnerships, give parents an attractive option for gradually passing a business to their heirs. Limited partnerships place ownership and management decisions in the hands of the general partners.

For example, parents could create a partnership structure establishing themselves the general partners and their heirs the limited partners. Limited partner status keeps children free from liabilities of the partnership but do not give them any right of control over the business. M.S.A.322A.26. As the general partners/ parents see fit, they can dilute the partnership agreement to give their children more control. The flexibility of partnerships structures complement estate-planning goals well.

Taxes and Small Business Associations

The second principal advantage of using partnerships as an estate-planning vehicle is as flow-through entities, partnerships are subject to one level of taxation. At the entity level, partnerships are not subject to taxation, unlike corporations. I.R.C. 702. Instead, each partner is subject to taxation on his or her distributive share of income, governed by the partnership agreement. I.R.C 701.

This may allow family run businesses to strategically allocate income to partners in a lower tax bracket (presumably children). Furthermore, gifting limited partnership interest in a family business to children may remove certain assets from the purview of estate taxes.

Although accepted as a legitimate form of estate planning for family-run businesses, the IRS is considering tweaking some rules that may impact family run partnerships. For example, partnerships typically use appraisals to value assets that can be discounted, resulting in lower tax exposure. According to the Wall Street Journal article published on June 26, 2015 , the IRS may be taking aim at valuations of stock passed through limited family partnerships. Proposed Treasury regulations in the near future could curtail the discount on certain partnership assets limited family partnerships enjoy.

Flexibility for the Family

Partnerships are a useful vehicle for thoughtful parents and business owners to accomplish estate-planning goals. Flexible management options and reduced level of taxation offer clear benefits for multigenerational family run businesses. However, compared to corporations, partnerships are still a developing area of tax and estate planning law. This should factor into any estate planning decisions for limited family partnerships.