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Exploring Family Limited Partnerships and Limited Liability Companies: A Guide for Graybar Electric Employees

If you own and operate a family business, a family limited partnership (FLP) or family limited liability company (FLLC) could become a vital component of your estate plan. A properly formed and maintained FLP or FLLC can facilitate the transfer of your business to the next generation, protect assets from potential creditors, and minimize income, gift, and estate taxes.

What is an FLP/FLLC?

Many of our Graybar Electric clients ask about FLPs and FLLCs. An FLP is a special form of limited partnership where members of a family serve as general and limited partners. An FLLC is a corporate entity owned by family members who may or may not serve as managers. With an FLP, general partners run the business. Limited partners have no vote and no say about day-to-day operations, but, they have limited liability; they aren't liable for the debts of the FLP in excess of their contributed capital. With an FLLC, all of the family members, even if they serve as managers, have limited liability (as with any corporate entity).

Note: The rest of this discussion will refer to an FLP; however, the underlying principles apply to FLLCs as well.

With a typical limited partnership, a general partner who has experience will team up with limited partners who have capital. In the family context, however, the senior generation typically starts out as both the general and the limited partners. They then gift the limited partnership interests to the younger generation. The general partners can gift as much as 99% of the business to the limited partners, keeping as little as 1%. This can be an ideal solution for our Graybar Electric clients who want to transfer ownership of their business to their children, but also want to keep control until their children can gain experience and become competent enough to manage the business on their own.

Asset Protection

An FLP can provide some measure of asset protection for the limited partners. It generally takes a court order (called a charging order) for a creditor to reach a limited partnership interest, and even this only requires the FLP to pay income to the creditor instead of the partner until the debt is paid. In this case, the creditor does not become a substitute partner. He or she must wait until the general partner decides to distribute income (which may be a very long time). In addition, FLP assets are likewise protected from loss due to divorce. The general partner, however, does not receive the same protection and is personally responsible for the debts and liabilities of the FLP.

Income Tax Considerations

An FLP is a pass-through entity for income tax purposes. This means that the IRS does not recognize an FLP as a taxpayer (as it does for a corporation), and the income of the FLP passes through to the partners. So, you can shift business income and future appreciation of the business assets to other members of your family who may be in a lower tax bracket. The family as a whole can enjoy tax savings. From 2018 to 2025, subject to various limits, an individual taxpayer can deduct 20% of domestic qualified business income (excludes compensation) from a FLP.

Tip: The partners must report the income earned by the FLP on their personal income tax returns and are responsible for payment of any tax owed. Income is allocated to each partner based on his or her share of the contributed capital (i.e., pro-rata share).

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Gift and Estate Tax Considerations

One of the most powerful advantages of an FLP that we'd like our clients from Graybar Electric to be aware of is that it can help minimize federal gift and estate taxes.

This is accomplished in three ways:

Leveraging the annual gift tax exclusion and gift and estate tax applicable exclusion amount: Gifts of interest in an FLP are subject to federal gift tax (and possibly state gift tax). However, you can minimize or eliminate your actual gift tax liability by transferring FLP interests in increments that are free from gift tax under the annual gift tax exclusion ($15,000 per recipient in 2019 and 2020). Further, every taxpayer has a federal gift and estate tax applicable exclusion amount equal to the basic exclusion amount of $11,580,000 (in 2020, $11,400,000 in 2019) plus any deceased spousal unused exclusion amount, so transfers that do not fall under the annual gift tax exclusion will be free from gift tax to the extent of your available applicable exclusion amount. Both the annual exclusion and the basic exclusion amount are indexed for inflation and may increase in future years.
Taking valuation discounts: You may be able to discount the value of the FLP interests given away. That's because the limited partners have very restricted rights, such as:(a) the inability to transfer an interest, (b) the inability to withdraw from the FLP, and (c) the inability to participate in management. These restrictions can result in a business value that is significantly less than the value of the underlying assets. These discounts can be considerable, totaling as much as 35%. The discounts available include the minority interest (lack of control) discount and the lack of marketability discount.
Removing future appreciation from your estate: Business assets generally appreciate (increase in value) over time. Distributing your assets among family members (through the FLP) freezes the current value and keeps any growth in value out of your estate later. You may have to pay gift tax now, but it will be less than if tax is calculated on a higher future value.

FLPs Must Comply With State Law and IRS Requirements

An FLP is subject to more restrictive rules than other forms of business entities. Care must be taken to create a valid FLP in the eyes of the state and the IRS. An FLP will be recognized only if it is formed for a valid business purpose. The FLP form will be disregarded if the IRS or the state finds that it was formed solely to avoid taxes.

Some specific purposes for creating an FLP include:

To adopt a family succession plan
To simplify annual gifting by the senior generation
To minimize income, gift, and estate taxes
To protect assets from potential creditors
To protect assets from waste by heirs
To consolidate assets into a single entity
To keep the business in the family
To decrease estate and probate costs

Additionally, an FLP may own a closely held business (other than a corporation that has made an election to be taxed as an 'S' corporation), real estate, marketable securities, or almost any other investment asset. Homes, cottages, or other personal use assets are normally not suitable for an FLP.

Tips For Forming And Maintaining A Valid FLP:

Have one or more substantial nontax purposes for creating the FLP, such as asset protection
Keep good records
Create the FLP while you're still in good health
Observe all legal formalities when creating the FLP and while operating the business
Hire an independent appraiser to value assets going into the FLP
Transfer legal title of assets going into the FLP
Put only business assets into the FLP — don't put any personal assets into the FLP
If you do put personal assets into the FLP, such as your home, pay fair market rent for their use
Don't commingle FLP assets and personal assets — keep them separate
Never use FLP assets for personal purposes
Keep enough assets outside the FLP to pay for personal expenses
Distribute income to partners pro rata

What steps must an employee take to ensure they accurately calculate their pension benefits when planning for retirement under the Electricians Pension Plan, IBEW 995? Employees need to understand the various factors that contribute to benefit calculations, including years of service credits, age, and any early retirement reductions. Participants should also familiarize themselves with the formulas outlined in the plan regarding Normal Retirement and Early Retirement benefits.

Employees under the Electricians Pension Plan, IBEW 995 can ensure accurate pension calculations by reviewing the plan's formulas, which consider factors like service credits, age, and early retirement reductions. The plan provides specific calculation methods for Normal and Early Retirement pensions, so employees should refer to their accrued credits and apply the appropriate formula based on the years of service to get a precise benefit estimate(Electricians_Pension_Pl…).

How does the Electricians Pension Plan, IBEW 995, treat periods of active service compared to breaks in service when determining eligibility for pension benefits? Employees should be aware that their length of service is critical to establishing eligibility, and any periods identified as breaks in service may impact their pension status. Understanding the definition and implications of breaks in service can be vital for maximizing retirement benefits.

Service periods under the Electricians Pension Plan, IBEW 995 are critical for pension eligibility and accrual. Breaks in service, defined as periods where an employee is not credited with at least 250 hours in a plan year, can disrupt benefit accrual and participation. However, the plan provides grace periods for specific situations such as disability or maternity, preventing these gaps from affecting eligibility(Electricians_Pension_Pl…).

What are the implications of returning to work after starting to receive benefits under the Electricians Pension Plan, IBEW 995, and how can it affect ongoing pension payments? It's important for employees to recognize the conditions classified as "Disqualifying Employment" that can lead to suspending their pension benefits. Knowing how working while receiving benefits influences the plan can help retirees make informed decisions about their post-retirement employment.

Returning to work after starting to receive benefits under the Electricians Pension Plan, IBEW 995 can result in a suspension of benefits if the work qualifies as "Disqualifying Employment." Employees should check the plan’s definitions to see if their employment will affect their pension payments. Generally, working over 40 hours per month in covered employment or similar trades can trigger a suspension(Electricians_Pension_Pl…).

In what ways can an employee's spousal status influence the benefits they receive from the Electricians Pension Plan, IBEW 995? Employees need to understand how their marital status affects pension distributions, including survivor benefits and waivers. This knowledge is crucial for planning, as certain benefit structures depend significantly on whether the participant has a qualified spouse.

Spousal status significantly affects the distribution of benefits under the Electricians Pension Plan, IBEW 995. If an employee is married, the default pension option is the Joint and Survivor Annuity, which provides a continued payout to the spouse upon the participant’s death. The plan also outlines the necessary waivers and consents required for changing these benefits based on marital status(Electricians_Pension_Pl…).

How do changes in the Internal Revenue Service (IRS) regulations affect the contribution limits and benefit payouts related to the Electricians Pension Plan, IBEW 995? Employees should keep informed on the most current IRS guidelines, as they directly influence how benefits are calculated and dispersed. Awareness of IRS limits can prevent unexpected tax penalties and ensure compliance with pension law.

IRS regulations play an important role in determining contribution limits and payout structures under the Electricians Pension Plan, IBEW 995. Changes to IRS rules may affect the maximum allowable benefits and tax treatments. Employees should keep up to date with IRS guidelines to avoid potential tax penalties and ensure their pension plan remains in compliance(Electricians_Pension_Pl…).

What documentation is required for employees to maintain their eligibility for pension benefits under the Electricians Pension Plan, IBEW 995, especially after significant life events such as marriage, divorce, or disability? Employees must notify the plan office of life changes and provide necessary documentation. Understanding what these documents are and how they should be submitted is crucial for maintaining eligibility and accessing benefits.

Significant life events such as marriage, divorce, or disability require timely submission of documentation to the Electricians Pension Plan, IBEW 995 to maintain eligibility. This may include marriage certificates, divorce decrees, or proof of disability. Employees should contact the plan office to ensure all required paperwork is properly submitted to avoid interruptions in benefits(Electricians_Pension_Pl…).

What processes are in place for employees to appeal a denial of benefits under the Electricians Pension Plan, IBEW 995, and what timelines must they adhere to? Employees should be aware of their rights under ERISA concerning claims and appeals, including the time limits for submitting appeals. This knowledge ensures they are equipped to address any potential issues they may encounter during the pension claim process.

If a claim for benefits is denied, the Electricians Pension Plan, IBEW 995 provides an appeals process. Employees must file a written appeal within 60 days of receiving the denial notice. The appeal should include any relevant documentation, and employees should follow the timeline and procedures outlined in the plan to ensure proper consideration of their case(Electricians_Pension_Pl…).

How can employees determine if their employer is meeting its financial obligation to the Electricians Pension Plan, IBEW 995, particularly regarding contributions? Understanding the mechanisms for verifying employer contributions can help employees ensure that they are accruing the appropriate benefits. Employees should know whom to contact and what reports they can access to gather this information.

Employees concerned about their employer meeting its contribution obligations to the Electricians Pension Plan, IBEW 995 can contact the plan’s administrative office for verification. The plan allows participants to access contribution reports to confirm that employers are properly crediting their accounts(Electricians_Pension_Pl…).

What resources are available through the Electricians Pension Plan, IBEW 995, for employees seeking to enhance their understanding of their retirement options and benefits? Employees should seek detailed information provided through the plan documents and know how to access educational resources, such as workshops or one-on-one sessions with plan administrators. Utilizing available resources ensures they are making informed decisions about their retirement.

The Electricians Pension Plan, IBEW 995 offers various resources to help employees understand their retirement options. These include the plan’s summary description, workshops, and individual consultations with plan administrators. Employees should make use of these tools to gain a clear understanding of their pension and plan effectively(Electricians_Pension_Pl…).

How can employees contact the Electricians Pension Plan, IBEW 995, for additional questions or clarification regarding their retirement benefits or the plan's provisions? It is essential for employees to know how to reach the plan's administrative office or the Board of Trustees for inquiries. Understanding the contact methods, including phone numbers and office addresses, greatly aids in effective communication when navigating retirement planning. These questions are framed to guide employees in understanding their rights and responsibilities as they prepare for retirement under the Electricians Pension Plan, IBEW

For additional questions or clarification regarding the Electricians Pension Plan, IBEW 995, employees can contact the plan's administrative office at the provided phone number or address. The office offers support for all queries related to pension benefits, eligibility, and documentation(Electricians_Pension_Pl…).