A viable
variation of a Family Limited Partnership is what I characterize as a FLIP or
formally, a Family Life Insurance Partnership.
So exactly how would this work? Previously
we discussed using Life Insurance as the most affordable way to develop a
Business Succession plan. Our latest entries
have concerned structuring a Family Limited Partnership. The idea behind such a partnership is that
the senior member of the family (Dad or Mom) can begin to GIFT interests in the
family business to junior members (children/grandchildren) and yet still control
the family business. Additionally, it
also helps freeze the value of the business for tax purposes. So what’s preventing you from combining the
two? Actually nothing.
Under a
FLIP, a parent or grandparent who considers a Life Insurance purchase as a way
to provide for a Business Succession plan forms a GENERAL BUSINESS
PARTHERSHIP.
KEY POINT: This partnership must comply with State Law.
The Business
Partnership’s interests are controlled by the INSURED Parent or Grandparent and
the family heirs (children and/or grandchildren). The NEW ENTITY, The BUSINESS PARTNERSHIP,
applies for a Life Insurance Policy. In
this application, the Family Partnership OWNS the Life Insurance policy (controlling
the Insurance) and is the BENEFICIARY of the Life Insurance Policy.
The Business
Partnership actually pays the premiums for the Insurance policy out of assets
from the Family Partnership Business. At
the demise of the INSURED (parent or Grandparent), the proceeds of the policies
are paid TAX-FREE to capital accounts of the remaining partners. This amount would have been formally and
legally written in the original BUSINESS PARTNERSHIP.
Would you
consider this a neat tax-favored approach?
I certainly would and have advised several businesses of this
approach. Furthermore you have other
significant advantages.
TAX-FREE
GROWTH IN THE POLICY’S ASSETS
TAX-FREE
INCOME
FLEXIBILITY
TO PAY PEMIUMS
AND ALSO THE INSURED’S ABILITY TO CONTROL AND
MANAGE THE PARTNERSHIP