A family limited partnership (FLP) can present several drawbacks despite its potential advantages for estate planning and asset protection. These drawbacks often stem from the complexity of its structure and the potential for legal challenges if not implemented and managed correctly. For instance, the creation and maintenance of an FLP involve significant administrative burdens, including the preparation of partnership agreements, annual filings, and ongoing accounting. Failure to adhere strictly to these requirements can jeopardize the partnership’s legitimacy and undermine its intended benefits.
Understanding the potential downsides is crucial for families considering an FLP. While frequently touted as a method to reduce estate taxes and shield assets from creditors, these benefits are not guaranteed. Improper valuation of assets contributed to the partnership, insufficient business purpose beyond tax avoidance, or the retention of too much control by the general partner can trigger scrutiny from tax authorities and lead to adverse tax consequences. Furthermore, the costs associated with establishing and maintaining an FLP, including legal and accounting fees, can be substantial, potentially outweighing the anticipated advantages, particularly for smaller estates.
