Chapter 14
Valuation of Family Limited Partnerships
The family limited partnership (FLP) is a sophisticated financial planning technique that, when implemented properly, enables a family to hold and manage its wealth, including the family business, within several generations of family members as partners. Families with significant wealth increasingly establish an FLP rather than a corporation because the FLP often is better suited to achieving certain objectives.
Some background on corporations and partnerships is helpful to understanding the FLP. The profits of a C corporation are taxed at a maximum rate of 35 percent (for federal tax purposes); when the after-tax profits of the C corporation are distributed to the shareholders as dividends, those same profits are taxed a second time to the individual shareholders, up to the maximum federal statutory rate of 38.6 percent. The combined corporate and personal tax rate can easily exceed 60 percent, even before state and local income taxes are taken into account.
Alternatively, the profits of a subchapter S corporation are, in general, taxed at the shareholder level only—making the S corporation a more appealing structure than the C corporation in many instances. However, there are numerous restrictions on the qualifications for functioning as an S corporation, even after the liberalizing amendments enacted in 1996.
By comparison, a partnership is a pure “flow-through” entity, meaning that the income realized by the entity flows ...
