“Freeze” Partnerships —
One Of The Most Powerful Techniques
In The Estate Planning Industry
If you read the article on Family Limited Partnerships (FLPs) you read how the assets in the FLP can be discounted up to 40%.
And then you read that “Freeze” Partnerships — a derivation of the traditional FLP — can obtain upwards of a 90% discount on assets.
How is this possible?
Without going into a lot of detail here, let’s just say that it’s possible due to its highly flexible nature. It can be readily adapted to a wide variety of needs that you might have.
A “Freeze Partnership” can significantly reduce the size of your taxable estate — while still avoiding gift taxes — and also be created to allow your heirs to have access to income and gift-tax free loans from a life insurance policy while you are still alive.
What does a “Freeze Partnership” look like?
In a “Freeze Partnership” there are two classes of interest: preferred and common. The preferred is considered “preferred” because it is entitled to preferred dissolution rights. The dissolution rights are fixed at a value of the property initially contributed to the partnership. In addition, there are usually preferred income rights as well. This means that the preferred interest holder is entitled to receive preferred distributions of net cash flow from the partnership, equal to a set percentage of the value of the dissolution value.
The preferred interests are much like preferred stock in a corporation, where the “common” interests are subordinate to the preferred interests — however, with an interesting twist. The common interests are subordinate to the preferred interests with regard to dissolution and income rights, but the common interest holders tend to have voting and managerial control over the partnership. The common interest holders share proportionately in the partnership’s income distributions, but only to the extent that the preferred interest holders have received the preferred income or dissolution payments.
There are multiple planning implications of using preferred family limited partnerships:
- First, because the liquidation values of the preferred interests are “frozen,” the common interests will receive all of the growth and appreciation of the assets held by the FLP. This can result in substantial amounts of wealth being shifted to the common interest holders. In other words, you and your spouse would be set up as preferred interest holders and your children as common interest holders.
- Second, since the common interests are subordinate to the preferred interests in many respects, especially with regard to cash flow, it is possible that the common interests would be subject to valuation discounts for gift or sale purposes. Thus, depending on the types of assets which the FLP is intended to own, there are substantial planning opportunities to use the preferred and common interest structure to provide significant wealth transfer planning benefits. And,
- Finally, a Preferred Limited Partnership often has multiple classes of interests (i.e., senior preferred, junior preferred, participating common, and non-participating common), so the planning can be very creative. The ability to use the preferred and common interest FLP in connection with your overall wealth planning can present substantial planning opportunities.
We grant you, this may sound a little arcane, and it’s difficult to show you how this powerful tool can give a substantial boost to your estate planning. That’s why we would welcome your call at (810) 714-9021 to set up a free, no-obligation consultation where we can explain how you can use this to shift considerable assets — free of both estate and gift taxes — to your heirs.
