If you own and administer a family business, a family limited partnership (FLP) or family limited liability company (FLLC) may play a crucial role in your estate plan. According to a recent study published by the American Bar Association in 2022, family limited partnerships (FLPs) can be a useful tool for wealth transfer planning for retirees and high net worth individuals. FLPs allow family members to pool their assets and transfer them to the next generation while maintaining control over the assets during their lifetime. This can result in significant tax savings and asset protection benefits for retirees and their families. FLPs can also be used to facilitate the transition of ownership and control of family businesses to the next generation while minimizing estate and gift taxes.
What is an FLP/FLLC?
Our Aetna clients frequently inquire about FLPs and FLLCs. A FLP is a unique type of limited partnership in which family members function as general and limited partners. A FLLC is a corporation owned by family members, who may or may not act as administrators. With an FLP, the business is managed by general partners. Limited partners have neither a vote nor a say in day-to-day operations, but they have limited liability; they are not responsible for the FLP's obligations in excess of their capital contributions. Even if they function as managers, all family members with a FLLC have limited liability (as with any corporate entity).
Note: The rest of this discussion will refer to an FLP; however, the underlying principles apply to FLLCs as well.
A typical limited partnership consists of a general partner with experience and limited partners with capital. However, in the family context, the senior generation typically begins as both the general and limited partners. The older generation then transfers the limited partnership interests to the junior generation. The general partners may transfer up to 99% of the business to the limited partners while retaining no more than 1%. This can be an excellent solution for our Aetna clients who wish to transfer ownership of their business to their children but wish to retain control until their children gain experience and become capable of managing the business independently.
Asset Protection
A FLP can provide limited partners with some level of asset protection. A court order (called a charging order) is typically required for a creditor to reach a limited partnership interest, and even then, the FLP is only required to pay the creditor instead of the partner until the debt is paid. In this instance, the creditor does not serve as a replacement partner. He or she must wait until the general partner decides (which could take a very long time) to distribute income. Additionally, FLP assets are protected from divorce-related loss. However, the general partner does not receive the same protection and is personally liable for the FLP's debts and liabilities.
Income Tax Considerations
A FLP is a pass-through entity for purposes of income taxation. This means that the IRS does not recognize an FLP as a taxpayer (as it does for a corporation), and that the FLP's income is passed through to the partners. Therefore, you can transfer business income and prospective appreciation of business assets to family members in a lower tax bracket. The entire family can benefit from tax savings. From 2018 to 2025, an individual taxpayer may deduct 20% of domestic qualified business income (excluding compensation) from an FLP, subject to various limits.
Tip: The partners must report the income earned by the FLP on their personal income tax returns and are responsible for payment of any tax owed. Income is allocated to each partner based on his or her share of the contributed capital (i.e., pro-rata share).
Gift and Estate Tax Considerations
Utilizing the annual gift tax exclusion and applicable gift and estate tax exclusion amounts: Gifts of interests in an FLP are subject to federal (and potentially state) gift tax. Nonetheless, you can reduce or eradicate your actual gift tax liability by transferring FLP interests in amounts exempt from gift tax under the annual gift tax exclusion ($15,000 per recipient in 2019 and 2020). In addition, each taxpayer has a federal gift and estate tax applicable exclusion amount equal to the basic exclusion amount of $11,580,000 (in 2020, $11,400,000 in 2019) plus any unused spousal exclusion amount, so transfers that do not qualify for the annual gift tax exclusion are exempt from gift tax up to the extent of your available applicable exclusion amount. Both the annual exclusion and the baseline exclusion amount are inflation-indexed and may increase in the future.
Using value reductions: You may be able to deduct the value of the donated FLP interests. This is because limited partners have very limited rights, including the incapacity to transfer an interest, withdraw from the FLP, and participate in management. These restrictions can cause a business's value to be substantially less than the value of its underlying assets. These discounts can be substantial, accumulating up to 35% off. Minority interest (lack of control) and absence of marketability discounts are among the available discounts.
Removing appreciation in the future from your estate: In general, business assets appreciate (increase in value) over time. By distributing your assets among family members (via the FLP), the current value is frozen and any future appreciation is excluded from your estate. You may be required to pay gift tax now, but the amount will be less than if the tax were calculated on a higher future value.
FLPs Must Comply With State Law and IRS Requirements
A FLP is subject to stricter regulations than other business entities. To establish a valid FLP in the eyes of the state and the IRS, care must be taken. A FLP will only be recognized if it was created for a legitimate business purpose. If the IRS or state determines that the FLP was formed solely to avoid taxes, the FLP form will be discarded.
Among the specific reasons for creating an FLP are:
To adopt a succession plan for the family
To facilitate senior citizens' annual gift-giving
To reduce income, gift, and estate tax liabilities
To safeguard assets against prospective creditors
To prevent successors from wasting assets.
To combine assets within a single entity.
To maintain the business within the family
To decrease estate and probate costs
A FLP may also own a closely held business (other than a corporation that has elected to be taxed as a 'S' corporation), real estate, marketable securities, and virtually any other investment asset. Homes, cottages, and other assets for personal use are typically unsuitable for an FLP.
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Tips For Forming And Maintaining A Valid FLP:
Create the FLP for one or more substantial nontax reasons, such as asset protection.
Keep accurate records
Develop the FLP while you are in excellent health.
Observe all legal requirements when forming the FLP and running the business.
Employ a third-party evaluator to assess the value of assets entering the FLP.
Transfer legal ownership of assets to the FLP
Put only business assets into the FLP; personal assets should not be included.
If you include personal assets, such as your residence, in your FLP, you must pay fair market rent for their use.
Don't combine FLP and personal assets; keep them distinct.
Never use FLP assets for your own benefit.
Maintain sufficient assets outside the FLP to cover personal expenses.
Distribute income to companions pro rata
Conclusion
A family limited partnership can be compared to a well-constructed retirement plan. Just as a retirement plan can help individuals protect and grow their assets for the future, a family limited partnership can help families preserve their wealth and pass it on to future generations. Like a retirement plan, a family limited partnership requires careful planning and management to ensure its success. It's essential to have a solid strategy in place to maximize the benefits and minimize potential risks. By working with experienced professionals and staying vigilant, families can enjoy the long-term benefits of a well-constructed family limited partnership, just as they can with a thoughtful retirement plan.
How does Aetna Inc.'s frozen pension plan affect employees' eligibility for benefits, and what specific criteria must current employees meet to qualify for any benefits from the Retirement Plan for Employees of Aetna Inc.?
Eligibility for Benefits: Aetna Inc.'s pension plan has been frozen since January 1, 2011, meaning no new pension credits are accruing. Employees who were participants before this date remain eligible for benefits but cannot accrue additional pension credits. To qualify for benefits, participants need to have been vested, which generally occurs after three years of service(PensionSPD).
In what ways can employees at Aetna Inc. transition their pension benefits if they leave the company, and what implications does this have for their tax liabilities and retirement planning?
Transitioning Pension Benefits: If employees leave Aetna, they can opt for a lump-sum distribution or an annuity. Employees can roll over their lump-sum payments into an IRA or other tax-qualified plans to avoid immediate taxes. However, direct rollovers must follow the tax-qualified plan's rules. If not rolled over, employees are subject to immediate tax and potential penalties(PensionSPD).
What steps should an Aetna Inc. employee take if they become disabled and wish to continue receiving pension benefits, and how does the company's policy on disability impact their future retirement options?
Disability and Pension Benefits: Employees who become totally disabled and qualify for long-term disability can continue participating in the pension plan until their disability benefits cease or employment is terminated. No additional pension benefits accrue after December 31, 2010, but participation continues under the plan until employment formally ends(PensionSPD).
Can you explain the implications of the plan amendment rights that Aetna Inc. retains, particularly concerning any potential changes in the pension benefits and what this could mean for employee planning?
Plan Amendment Rights: Aetna reserves the right to amend or terminate the pension plan at any time. If the plan is terminated, participants will still receive benefits accrued up to the date of termination, protected by ERISA. Any future changes could impact employees' planning and retirement options(PensionSPD).
How does the IRS's annual contribution limits for pension plans in 2024 interact with the provisions of the Retirement Plan for Employees of Aetna Inc., and what considerations should employees keep in mind when planning their retirement contributions?
IRS Contribution Limits: The IRS sets annual contribution limits for pension plans, including defined benefit plans. In 2024, employees should ensure that their pension contributions and tax planning strategies align with these limits and the provisions of Aetna's pension plan(PensionSPD).
What are the options available to Aetna Inc. employees regarding pension benefit withdrawal, and how can they strategically choose between a lump-sum distribution versus an annuity option?
Withdrawal Options: Aetna employees can choose between a lump-sum distribution or various annuity options when withdrawing pension benefits. The lump-sum option allows for immediate access to funds, while annuities provide monthly payments over time, offering a more stable income stream(PensionSPD).
How does Aetna Inc. ensure compliance with ERISA regulations concerning the rights of employees in the retirement plan, and what resources are available for employees to understand their rights and claims procedures?
ERISA Compliance: Aetna complies with ERISA regulations, ensuring employees' rights are protected. Resources are available through the Plan Administrator and myHR, providing information on claims procedures, plan rights, and how to file appeals if necessary(PensionSPD).
What documentation should employees of Aetna Inc. be aware of when applying for their pension benefits, and how can they ensure that they maximize their benefits based on their years of service?
Documentation for Benefits: Employees should retain service records and review their benefit statements to ensure they receive the maximum pension benefits. They can request additional documents and assistance through myHR to verify their years of service and other relevant criteria(PensionSPD).
How do changes in interest rates throughout the years affect the annuity payments that employees at Aetna Inc. might receive upon retirement, and what strategies can they consider to optimize their retirement income?
Impact of Interest Rates on Annuities: Interest rates significantly affect annuity payments. Higher interest rates increase the monthly annuity amount. Employees should consider the timing of their retirement, especially at the end of the year, when interest rates for the following year are announced(PensionSPD).
If employees want to learn more about their pension options or have inquiries regarding the Retirement Plan for Employees of Aetna Inc., what are the best channels to contact the company, and what specific resources does Aetna provide for assistance?
Contact for Pension Inquiries: Employees can contact myHR at 1-888-MY-HR-CVS (1-888-694-7287), selecting the pension menu option for assistance. Aetna also provides detailed resources through the myHR website, helping employees understand their pension options and benefits(PensionSPD).
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