In years past, many agricultural families passed on control of assets, properties, and family businesses through a limited partnership arrangement. The parents establish the children as “managers” of the business and slowly build their wealth through designating to them the maximum tax-free amount each year. That same strategy is what many financially successful families are using through family limited partnerships today.

A limited partnership is a special type of partnership where limited partners receive a share of the profits, but have no management responsibilities, and also no personal liability. The lack of personal liability is what drives most limited partnerships. A limited partnership requires a written agreement between the general partners (the business management) and the limited partners (the investors). The limited partners each make an investment and is guaranteed a pre-stated share of profits.

How does all this work when transferring money to posterity? Many parents or grandparents use the limited partnership model by designating themselves as general partners and their children as limited partners.

Just like in a limited partnership, there are one or more general partners (the parents) and one or more limited partners (the parents and the children). The limited partners have no control over the management of the partnership details and affairs and are also have none of the liabilities of the partnership.

Many advantages for establishing a family limited partnership exist such as the fact that initially, the parents are both the general and limited partners. Because of the restricted rights of limited partners, their shares are worth less than the general partners' shares. Each year, the parents can gift the maximum, tax-free amount ($13,000 annual gift tax exclusion in 2011) of their limited partnership shares to their other limited partners (children). As general partners, the parents continue to manage their properties and assets while the children hold no managerial positions. Over time, this gradual gifting will shift ownership to the children while avoiding estate and gift taxing liabilities. In addition, this structure continues to provide asset protection for the limited partners. In some case needing even more asset protection, the general partner will be a corporation or LLC, and the parents will own the corporation or LLC.

In establishing a family limited partnership, be sure to follow the guidelines of your states' limited partnership act (or have your attorney guide you). For more questions on family limited partnerships, call our offices at (661) 426-2499 and we'd be happy to assist you. Antelope Valley estate planning law firm Thompson Von Tungeln (TVT) offers sophisticated estate planning and administration for the affluent, discriminating client. As Board Certified Specialists in Estate Planning, Trusts and Probate as certified by the State Bar of California Board of Legal Specialization, partners Mark E. Thompson and Kevin L. Von Tungeln are expertly equipped to serve these clients with the creative, effective and custom solutions they demand. For more information, contact TVT at (661) 426-2499 or visit their websites at www.EstatePlanningSpecialists.com and www.Medi-CalHelp.com.