A family limited partnership (“FLP”) will typically include the following features:
- The limited partnership will have an extended term, such as 30 to 40 years. The term should be materially in excess of the senior family member’s life expectancy.
- Income, gains, and losses will be shared in proportion to capital accounts as a general rule. Occasionally, one or more partners (especially, a senior member of the family) will be entitled to an income preference analogous to cumulative preferred corporate stock. See IRC 2701.
- Distributions generally will be limited. For example, distributions may be limited to the limited partnership’s net income, exclusive of capital gains. Customarily, at least an amount corresponding to partners’ tax liabilities, assuming the highest marginal tax rates, will be distributed annually. Distributions should be limited to cash unless more than one partner, and possibly even all of the partners consent to an in kind contribution.
- Liquidation of the limited partnership will be restricted. Possibly all of the partners will be required to consent to a liquidation of the limited partnership prior to the end of its specified term. At a minimum, no one partner, acting alone, should have the right to liquidate the partnership.
- No partner should have the right to withdraw from the limited partnership and receive the fair market value of his or her interest.
- Transfers of partnership interest will require the consent of one or more partners other than the transferring partner. Rights of first refusal may be given to the other partners, the partnership, or both.
- There should be at least two general partners, or preferably a corporate general partner or limited liability company not controlled by a senior family member. A senior family member should not be the only general partner and should not control the sole corporate general partner or limited liability company.
- In most states, a limited partner cannot play any management role. In Georgia, a limited partner may be given a management role, but a senior family member, acting as a limited partner, should not be given a controlling management role.
