Going into business with family can be tricky, even in the best of circumstances. When you want to start a business with your brother, parents, or children, you might consider setting up a family limited partnership or a trust. In other circumstances – imagine being a parent wanting to save money for their kids, for instance – a family limited partnership and trust can both prove to be attractive prospects.
Yet there are key differences between family limited partnerships vs. trusts. Let’s break down those differences in detail so you know which solution is right for your needs.
What Exactly is a Family Limited Partnership (FLP)?
A family limited partnership is, in essence, a holding company similar to a limited liability company or LLC. A family limited partnership can be owned by two or more family members and might be created for a variety of different purposes.
With an FLP, family members pool their money together for business purposes, tax savings, and more. Every FLP allows the originators to establish general partners and limited partners:
- General partners are the primary owners of the family limited partnership. They are totally responsible for managing the FLP and its various assets. As an example, a pair of parents might set up an FLP for their family, naming themselves the general partners and naming all of their kids the limited partners
- Limited partners have an economic interest in the family limited partnership. But they don’t have any ability to control or influence the operation of the FLP
In contrast with the members of an LLC, the members of an FLP can have different ownership control levels.
When Might You Use an FLP?
A family limited partnership can be an excellent arrangement in two primary cases: going into business and estate planning/gift giving.
Going Into Business with Family
Say that you or your family member wants to start a new company. With your business acumen, you know that you’ll be the best choice to run the company. With this in mind, you approach your family members for investment money so you can begin your new venture.
While your family members agree to finance your venture, you don’t really trust them to run the company successfully. The last thing you want to do is form an LLC with your uncle, brother, and grandfather, all of which are known for less than stellar fiduciary responsibility.
Therefore, you set up a family limited partnership instead. You become the general partner, while all the other investors become limited partners.
In this way, everyone has a stake in the company, and everyone succeeds when the company does well. But you don't have to worry about financially irresponsible family members ruining things, spending money, and so on.
With a family limited partnership, you can establish a variety of things like:
- How the money will be invested
- How long the money is invested for – this can’t be changed by limited partners, so they can’t back out until the date described in the FLP’s founding documents
- When members of the FLP get distributions
- And so on
The potential benefits of this setup are many. With a family limited partnership’s tight structure, members can’t back out of the deal, they can’t mess with money, and they can’t sell their ownership shares ahead of time.
Estate Planning
Alternatively, maybe you wish to get started with estate planning, such as passing on inheritance to the kids. An FLP can be beneficial here as well.
When it is optimally set up, a family limited partnership can be created to take advantage of tax breaks, such as the gift tax break. For instance, if you want to give a one-time gift of $30,000 to your grandkids, an FLP can help you do that without allowing the kids to dip into that money before the time comes.
More specifically, a family limited partnership can be useful if you want to pass money on, but you don’t want to give more money to your children or grandchildren aside from a one-time gift or under very specific circumstances. This will help you make the most of tax benefits and other opportunities.
What’s a Trust?
A trust, put simply, is a fiduciary relationship where you (the grantor) give control of one or more assets to a trustee for the purpose of providing those assets to a beneficiary at some point in the future.
For instance, you might have inherited a great deal of money, so you put it in a trust intended for your kids when they become adults.
As you might already have picked up, a trust is a very different kind of financial and legal entity compared to a family limited partnership. A family limited partnership is closer to a company, like an LLC, than it is to a trust, so the two are oftentimes used for very different financial goals.
Use Cases for Trusts
There are dozens of different ways in which you can use trusts, which is why they are such popular instruments. Just a few include:
- Protecting and preserving assets for a long time. This is a particularly important use case for high net worth individuals, such as those who earn several million dollars per year or more. Dedicated asset protection trusts or APTs are available for specifically this purpose, and they’re the kinds of trusts that the experts at Dominion can help you form
- Controlling how your wealth is distributed to future beneficiaries, like kids, grandkids, etc.
- Minimizing or completely escaping federal and state taxes, which also makes trusts great for getting financial gifts and for storing assets over the long-term
- Helping relatives manage financial affairs
- Managing real estate and other physical assets
- And more
Some of these use cases overlap with some of the potential uses for family limited partnerships. Still, the differences between these instruments can make one or the other better for a specific circumstance.
Key Differences Between Family Limited Partnerships vs. Trusts
As you might have gathered, there are several big differences between FLPs and trusts. But let’s take a deeper dive into each of these.
Levels of Control for Partners/Grantors
Firstly, family limited partnerships and trusts offer different levels of control for their originators.
With an FLP, the originators of the business arrangement can become general partners. They retain ultimate control over the family limited partnership, the assets and money invested within, and more.
In contrast, when you make a trust as the grantor, your trustee has control over the trust and its assets. It's true you can sometimes modify your trust, particularly if it is a revocable trust. Even so, day-to-day management of the trust and its assets goes to a third party, which is why (some) trusts are so beneficial for asset protection.
So while the partners in an FLP retain much more control of the partnership than the trust’s grantor, the latter gives up control to benefit from significant tax breaks. There’s a reason they say nothing in life is free.
Use Cases
You might also use a family limited partnership in different cases compared to trusts.
A trust might not be the best financial instrument to use if you want to go into business with your family members, for instance.
A family limited partnership is a tool explicitly designed for this purpose, and it allows you to make sure that all investors have the right level of control based on their responsibility, level of participation in the business venture, etc.
Trusts can be used for many different things, though, including inheritance management, estate management, taking advantage of tax breaks, asset protection – the list goes on.
Trusts are so flexible, you can essentially use them for any financial goal you have – and that’s one of their main benefits. Of course, FLPs are a lot more specific, but they’re also very effective at what they do.
Asset Management
Lastly, trusts and FLPs differ heavily in terms of who manages the assets contained within these vehicles.
Again, a trust requires you to put asset protection and management in the hands of a third party aside from you and any beneficiaries. With an FLP, you can create a family limited partnership and manage the assets, so long as you are one of the general partners in the business arrangement.
This isn’t to say that a trust isn’t ideal for high net worth individuals who still want to retain flexibility and control over their assets.
There are plenty of cases in which, say, a high-powered executive with millions to their name but no time to manage their wealth can benefit from a trust’s hands-off approach to management. Still, the fact that they’re giving up control can be a dealbreaker for many.
Are FLPs Ideal for High Net Worth Individuals?
It depends on your goals.
If you want to go into business with family members, an FLP is a potentially effective solution to any concerns you may have about investors backing out, irresponsible family members buying or selling things, and so on.
However, if you want more discretionary breadth regarding how things are run, you’ll want to set up a trust instead. Trusts are especially good for those with a lot of money – such as yourself – because you don’t want that money to just sit in a financial vehicle. You want it to work for you; that’s how you make more money, after all.
On top of that, many high net worth individuals want freedom when it comes to their assets. They want to be able to change their minds, move their money around, and invest it in smart places to make more money. When you work with the right trustee, all of this and more is possible.
Therefore, you should get in touch with the experts at Dominion. Our experienced and trusted team of lawyers, trustees, financial advisors, and other expert professionals can offer anything and everything wealthy entrepreneurs like yourself need to achieve asset security.
We’ll help you achieve your short and long-term financial goals, whether that's protection, wealth growth, or something completely different. Contact us today and get the professional team you need in your corner.
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