Richard Houlihan
CPA, ABV, ASA Co-Founder & Chairman,
Houlihan Smith & Company, Inc.
www.houlihansmith.com

The creation and implementation of a sound family business succession plan can provide a smooth and cost-effective transition of ownership to the next generation.

Though family businesses do not have to worry about a federal estate tax in 2010, state estate taxes are still in effect. And barring any unexpected legislation from Congress, the federal estate tax will return in 2011. Therefore, family businesses should consider strategies for reducing their estate tax liability. These include gifting assets and creating family limited partnerships.

Gifting assets often requires extensive planning, but handing over a company’s assets piece by piece on an annual basis can be a simple and effective way to avoid paying certain taxes on the transfer. The annual exclusion amount for gift taxes did not change from 2009 to 2010; gifts of $13,000 or less to anyone are tax free. A $1 million lifetime gift exemption is available as well. These exemption amounts can double when a spouse matches the gifts. However, if the gift is in the form of stock, the gift recipient is subject to capital gains tax.

Family limited partnerships are another tool for preserving assets and transferring control to the next generation. When utilized effectively, limited partnerships can protect assets from creditors and allow significant discounts for gift and estate tax purposes. A family limited partnership (FLP) is a form of a limited partnership where a family member serves as either a general partner (GP) or a limited partner (LP), depending on his or her position within the business and family.

When the GP transfers assets to the partnership, that person owns all of the limited partnership interests. From that point forward, the GP can transfer limited partnership interests to his or her successors; this is usually done on an annual basis. Gifts of LP interests do not qualify under the $13,000 annual gift tax exclusion; however, they are counted against the $1 million lifetime gift exemption.

The value of limited partnerships are discounted for the lack of control and marketability limited partners have over the business. The GP retains managerial control irrespective of his or her ownership interests.

By structuring your family business as a limited partnership, you can be confident that your family will avoid paying unnecessary taxes as the next generation takes control of the business.

Tips for Limited Partnerships

• Establish a limited partnership early. 
• Transfer the assets you expect to appreciate the most first.
• Find a skilled and independent valuation advisor.
• Do not set up a family limited partnership if the general partner is in poor health or late in life.
• Do not include an offshore trust in the family limited partnership.