The FLP offers other advantages as well:
- consolidated control over partnership distributions and operations by the general partner;
- facilitated transfer of assets that are difficult to divide among heirs; and
- asset protection potential and investment flexibility.
The Internal Revenue Service (IRS) can challenge whether the FLP is a valid business entity. If it is determined that the FLP is personal in nature, the IRS often prevails. Nevertheless, the FLP still can be a successful estate planning technique when the partnership holds operating business interests.
Charitable Remainder Trust A charitable remainder trust (CRT) is designed to significantly reduce a business owner’s income tax burden and provide an endowment to a charity. The trust pays a fixed dollar amount or a percentage of the annual value of its assets to a non-charitable (income) beneficiary for life or for a specific number of years. Often, the non-charitable income beneficiary is the grantor’s children or the grantor himself. Upon expiration of the income beneficiary’s interest in the CRT, the trust terminates in favor of the charitable beneficiary, and the charity receives its endowment.
The grantor of the CRT receives an income and gift tax deduction (or an estate tax deduction if the trust is funded by a transfer at death) for the actuarially determined present value of the charity’s remainder interest.
A CRT is generally exempt from income tax, so any gain realized by a CRT on the sale of appreciated assets, and any income earned by the CRT, will not be subject to income tax until it is distributed to the non-charitable income beneficiary. As a result, a CRT may provide the opportunity for significant income tax deferral.
With professional advice, business owners and their families can implement estate plans that will protect their financial legacies. A solid plan does not come together overnight, so it’s best to start as early as possible.