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 FedEx 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 FedEx 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.
What are the implications of the Funding Target Attainment Percentage for FedEx Corporation employees, and how does it impact the security of the pension benefits offered by FedEx Corporation? This question seeks to explore the nuances of the funding target attainment percentage as reported in the annual funding notice, examining how this metric not only reflects the financial health of FedEx Corporation's pension plan but also how it affects employee confidence in future benefit payments and retirement planning.
Funding Target Attainment Percentage: The Funding Target Attainment Percentage for FedEx Corporation indicates the degree to which the pension plan is funded. A percentage of 101.33% for 2022 suggests that the plan has sufficient assets to cover its liabilities, providing security for employees' pension benefits. This high percentage likely increases employee confidence in the stability and reliability of their future pension payouts, essential for long-term retirement planning.
How does the merger of the FedEx Freight Pension Plan into the FedEx Corporate Employees’ Pension Plan influence the benefits currently available to FedEx Corporation employees? This question aims to delve into the practical changes that may arise due to this merger, assessing whether it aligns with employee expectations regarding their pension benefits and how the transition process is managed by FedEx Corporation.
Merger of Pension Plans: The merger of the FedEx Freight Pension Plan into the FedEx Corporate Employees’ Pension Plan appears to have been strategically managed to maintain benefit stability. Despite increasing liabilities by 5.3%, the merger was structured to ensure no negative impact on the benefit amounts payable to participants from either plan, preserving the expected pension benefits for all affected FedEx Corporation employees.
In terms of investment strategies, what measures does FedEx Corporation implement to ensure that its pension plan investments align with the long-term liabilities expected to be paid out to retirees? This question encourages an exploration of the investment policies in place, examining the asset allocations and risk management strategies that FedEx Corporation employs to ensure sustainable funding for its pension obligations, which could potentially include detailed analyses of stocks, debts, and alternative investments.
Investment Strategies: FedEx Corporation employs a diversified investment strategy across equities, fixed income, and alternative investments, aiming to meet long-term pension liabilities. This approach, which includes both active management strategies and the limited use of derivatives, is designed to generate returns that exceed market indices, thus ensuring adequate funding of pension obligations.
What options do employees of FedEx Corporation have for accessing their pension plan statements, and how frequently are these statements generated? The focus here is to understand the communication strategies employed by FedEx Corporation regarding pension benefit statements, including technological access points and the importance of these documents for employee financial planning.
Pension Plan Statements: FedEx Corporation provides annual pension plan statements through their Retirement Service Center, available electronically each fall. Employees can access their statements online or request them if notifications are not received, ensuring transparency and aiding in personal financial planning.
How are contributions to the FedEx Corporation Employees’ Pension Plan determined, and what role do excess contributions play in the plan's overall funding strategy? This question aims to educate employees about how the company balances mandatory contribution levels with potential excess contributions, exploring how these factors interact to influence the plan's solvency and employee benefits.
Contributions to the Pension Plan: Contributions to the FedEx Corporation Employees' Pension Plan are calculated to meet at least the minimum legal requirement and potentially include voluntary excess contributions. These excess contributions can help manage the plan's funding level and ensure its solvency, benefiting overall pension security for employees.
What types of benefits are guaranteed under the Pension Benefit Guaranty Corporation (PBGC) for FedEx Corporation employees, and what limitations exist that employees should be aware of? By focusing on the guaranteed benefits, this question prompts a discussion on the security of specific benefits provided by FedEx Corporation and highlights limitations, allowing employees to understand their rights fully.
PBGC Guarantee: The Pension Benefit Guaranty Corporation guarantees certain types of benefits for FedEx Corporation employees, such as pension benefits at normal retirement age and most early retirement benefits. However, there are limitations, such as exclusions for benefits without vested rights and recently increased benefits, which employees should be aware of to fully understand their pension security.
In what ways does the FedEx Corporation plan to adjust its pension funding strategy in light of changing federal laws that impact pension obligations? Employees are encouraged to consider how legislative changes influence corporate policies surrounding retirement benefits and the proactive strategies FedEx Corporation might take to remain compliant while ensuring the security of employee pensions.
Adjustments to Funding Strategy: FedEx Corporation is likely to adjust its pension funding strategy in response to legislative changes affecting pension obligations, such as those introduced by recent acts adjusting how pension liabilities are calculated. This proactive approach aims to ensure compliance with new laws while continuing to secure the financial health of the pension plan.
What are the steps that FedEx Corporation employees must take if they are considering retirement, particularly in how to navigate the pension plan and gain access to their benefits? This question aims to provide clarity on the retirement process, ensuring that employees are equipped with the necessary information regarding required documentation, timelines, and points of contact within FedEx Corporation.
Steps for Retirement Planning: Employees considering retirement should contact the FedEx Retirement Service Center to navigate their pension plan benefits. This process involves understanding necessary documentation, timelines, and available support, facilitating a smooth transition into retirement.
How does FedEx Corporation plan to manage potential funding shortfalls in the pension plan, and what mechanisms are in place for notifying plan participants should such an event occur? Employees would need to understand the proactive measures put in place by FedEx Corporation to address funding-related challenges while also knowing what this means for their benefits.
Managing Funding Shortfalls: In the event of potential funding shortfalls, FedEx Corporation has policies in place to manage such situations, including strategic contributions to mitigate shortfalls. The company maintains transparency with plan participants about funding levels and any significant changes affecting the pension plan.
For those seeking more information about their pensions and retirement options, how can FedEx Corporation employees contact relevant departments, and what resources are available for assistance? This question provides an opportunity for employees to familiarize themselves with contact points such as the FedEx Retirement Service Center, emphasizing the importance of open communication channels for addressing inquiries related to their pensions. Feel free to consult the provided document for more in-depth exploration of these topics.
Contacting for Pension Information: FedEx Corporation employees seeking more information about their pensions or retirement options can contact the FedEx Retirement Service Center. This center provides essential resources and support, ensuring employees have access to all necessary information regarding their retirement planning.
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