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 General Mills 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 General Mills 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.
Featured Video
Articles you may find interesting:
- Corporate Employees: 8 Factors When Choosing a Mutual Fund
- Use of Escrow Accounts: Divorce
- Medicare Open Enrollment for Corporate Employees: Cost Changes in 2024!
- Stages of Retirement for Corporate Employees
- 7 Things to Consider Before Leaving Your Company
- How Are Workers Impacted by Inflation & Rising Interest Rates?
- Lump-Sum vs Annuity and Rising Interest Rates
- Internal Revenue Code Section 409A (Governing Nonqualified Deferred Compensation Plans)
- Corporate Employees: Do NOT Believe These 6 Retirement Myths!
- 401K, Social Security, Pension – How to Maximize Your Options
- Have You Looked at Your 401(k) Plan Recently?
- 11 Questions You Should Ask Yourself When Planning for Retirement
- Worst Month of Layoffs In Over a Year!
- Corporate Employees: 8 Factors When Choosing a Mutual Fund
- Use of Escrow Accounts: Divorce
- Medicare Open Enrollment for Corporate Employees: Cost Changes in 2024!
- Stages of Retirement for Corporate Employees
- 7 Things to Consider Before Leaving Your Company
- How Are Workers Impacted by Inflation & Rising Interest Rates?
- Lump-Sum vs Annuity and Rising Interest Rates
- Internal Revenue Code Section 409A (Governing Nonqualified Deferred Compensation Plans)
- Corporate Employees: Do NOT Believe These 6 Retirement Myths!
- 401K, Social Security, Pension – How to Maximize Your Options
- Have You Looked at Your 401(k) Plan Recently?
- 11 Questions You Should Ask Yourself When Planning for Retirement
- Worst Month of Layoffs In Over a Year!
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 can employees of General Mills, Inc. maximize their benefits under the BCTGM Retirement Plan, and what factors are considered in determining pension amounts for those nearing retirement? This question aims to explore the intricate details of how General Mills, Inc. structures its pension benefits to support employees’ future financial stability. It's important for employees to understand the value of their years of service and how this affects their ultimate pension payout as they approach retirement.
Maximizing Benefits under the BCTGM Retirement Plan: Employees of General Mills can maximize their benefits under the BCTGM Retirement Plan by understanding how their years of service and negotiated benefit levels directly affect the pension they receive. The pension amount is determined by the length of service and a defined benefit formula based on the number of years of Benefit Service accrued. As employees approach retirement, they should consider whether they meet eligibility criteria for early or normal retirement, as these factors influence the ultimate pension payout(General_Mills_2024_Pens…).
What are the eligibility requirements for participating in the BCTGM Retirement Plan at General Mills, Inc., and how does this participation impact future retirement benefits? Employees should be well-informed about what constitutes eligibility to participate in the retirement plan. Understanding criteria such as service length, employment status, and union participation is crucial, as it directly relates to their ability to accrue retirement benefits.
Eligibility Requirements for BCTGM Retirement Plan: To participate in the BCTGM Retirement Plan, employees must be regular employees of General Mills covered by a collective bargaining agreement. Eligibility is automatic after completing a probationary period. Participation impacts future retirement benefits as employees begin to accrue pension benefits based on years of service, which contributes to their final payout during retirement(General_Mills_2024_Pens…).
In what ways does General Mills, Inc. ensure that benefits from the BCTGM Retirement Plan remain protected under federal law, and what role does the Pension Benefit Guaranty Corporation (PBGC) play in this? Knowledge of the protections available can significantly influence employees' assurance in the viability of their pension benefits. It is vital for employees to recognize how federal guarantees work in safeguarding their retirement benefits.
Federal Law Protections and PBGC's Role: The BCTGM Retirement Plan is protected under federal law, ensuring that employees’ retirement benefits are safeguarded. The Pension Benefit Guaranty Corporation (PBGC) insures vested benefits, including disability and survivor pensions, up to certain limits. This protection provides employees with assurance that their pensions are protected, even in the event of plan termination(General_Mills_2024_Pens…).
How does General Mills, Inc. address the complexities of vesting in the BCTGM Retirement Plan, and what can employees do if they are concerned about their vested rights? Vesting is a key concept that affects employees' access to benefits over their careers. Employees need to understand the vesting schedule outlined by General Mills, Inc. and the implications it has on their retirement plans.
Vesting in the BCTGM Retirement Plan: Employees vest in the BCTGM Retirement Plan after completing five years of Eligibility Service or upon reaching age 65. Once vested, employees have a non-forfeitable right to their pension benefits, which means they retain their pension rights even if they leave the company before reaching retirement age(General_Mills_2024_Pens…).
What options are available to employees of General Mills, Inc. if they experience a change in their employment status after being vested in the BCTGM Retirement Plan, and how might this impact their future retirement pensions? This question prompts discussion on the plan's provisions regarding reemployment and what employees should be aware of when considering changes to their employment status.
Impact of Employment Status Changes on Pension: If an employee's status changes after being vested in the BCTGM Retirement Plan, such as leaving the company, they may still be entitled to pension benefits. The plan outlines provisions for reemployment and how prior service years are counted toward future pension calculations. Employees who are reemployed may have their previously earned service restored(General_Mills_2024_Pens…).
How does the BCTGM Retirement Plan at General Mills, Inc. work in conjunction with Social Security benefits, and what should employees be aware of regarding offsets or deductions? This can encompass the interplay between corporate pension plans and governmental benefits, which is critical for employees to plan their retirement effectively.
Coordination with Social Security Benefits: The BCTGM Retirement Plan operates in addition to Social Security benefits. There are no direct offsets between the pension and Social Security benefits, meaning employees receive both independently. However, employees should be aware of how the timing of drawing Social Security and pension benefits may affect their overall financial situation(General_Mills_2024_Pens…).
What steps must employees of General Mills, Inc. take to initiate a claim for benefits under the BCTGM Retirement Plan, and how does the claims process ensure fairness and transparency? A clear comprehension of the claims process is essential for employees to secure their pension benefits. This question encourages exploration of the procedures in place to assist employees in understanding their rights and options.
Claiming Benefits under the BCTGM Retirement Plan: Employees must terminate employment before claiming their BCTGM Retirement Plan benefits. The claims process involves submitting the required forms, and employees must ensure they provide all necessary documentation for a smooth process. The pension is generally paid monthly, with lump-sum options available under specific circumstances(General_Mills_2024_Pens…).
How does the retirement benefit formula of the BCTGM Retirement Plan operate, and what specific factors should an employee of General Mills, Inc. consider while planning for retirement? Delving into the calculations involved in determining retirement benefits is important for employees to understand how their service years and other contributions come together to form their final retirement payout.
Retirement Benefit Formula: The retirement benefit formula is calculated based on the years of Benefit Service and a defined benefit level. As of 2024, for each year of Benefit Service, employees receive $87 per month (increasing to $88 after June 1, 2025). Planning for retirement involves considering how long they will work and the benefit level in place at the time of retirement(General_Mills_2024_Pens…).
What additional resources or support does General Mills, Inc. provide to assist employees in planning their retirement and ensuring they make the most of their benefits offered under the BCTGM Retirement Plan? Understanding the tools and resources available can empower employees to take proactive steps in managing their retirement plans effectively.
Resources for Retirement Planning: General Mills offers resources like the Benefits Service Center and online portals (e.g., www.mygenmillsbenefits.com) to assist employees with retirement planning. These tools help employees understand their benefits, calculate potential payouts, and explore options for maximizing their retirement income(General_Mills_2024_Pens…).
How can employees contact General Mills, Inc. for further information about the BCTGM Retirement Plan or specific queries related to their retirement benefits? This question is crucial so employees know the appropriate channels for communication and can seek clarification on any concerns they may have regarding their retirement planning.
Contact Information for Plan Inquiries: Employees can contact General Mills for more information about the BCTGM Retirement Plan through the Benefits Service Center at 1-877-430-4015 or visit www.mygenmillsbenefits.com. This contact provides direct access to support and answers to questions about their retirement benefits(General_Mills_2024_Pens…).
-2.png)
.webp)