New Update: Healthcare Costs Increasing by Over 60% in Some States. Will you be impacted?

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

Healthcare Provider Update: NiSource provides employees with a variety of health insurance options including PPO, HMO, and high-deductible plans with HSAs. Dental and vision coverage is available, along with FSAs for healthcare and dependent care. Life insurance equal to twice base pay is company-paid, with options to purchase additional coverage. Disability benefits, accident insurance, and paid sick leave are also included. Retirement benefits feature a 401(k) plan with matching, and employees may receive opt-out credits if they decline coverage 2. NiSource As ACA premiums rise, NiSources employer-sponsored plans and pre-tax savings accounts offer employees a more affordable and stable alternative to marketplace coverage. With insurers requesting double-digit increases and federal subsidies potentially expiring, employer-backed plans like NiSources help shield employees from steep out-of-pocket costs. Click here to learn more

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 NiSource 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 NiSource 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).

Featured Video

Articles you may find interesting:

Gift and Estate Tax Considerations

One of the most powerful advantages of an FLP that we'd like our clients from NiSource 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

As an employee of National Grid, what are the key eligibility criteria for participating in the Pension Plan specifically for Niagara Mohawk Power Corporation employees? How might these criteria impact your personal retirement planning and the benefits you expect to receive upon retirement from National Grid?

Eligibility Criteria for Niagara Mohawk Pension Plan: Employees of Niagara Mohawk Power Corporation who are represented by Local Union 97 of the IBEW and work at least 20 hours per week or accumulate 1,000 hours in a Pension Plan year are eligible. Participation begins automatically on the first day of employment. These criteria directly impact retirement planning by determining when employees begin accruing pension benefits and how much they will receive at retirement(National_Grid_2023_Niag…).

Within the framework of the National Grid Pension Plan, how does the cash balance formula work in calculating retirement benefits, and what implications does this have for employees of Niagara Mohawk Power Corporation when considering their long-term financial outlook?

Cash Balance Formula: The National Grid Pension Plan for Niagara Mohawk employees uses a cash balance formula that provides monthly pay-based credits (starting at 4% and increasing with years of service) and interest credits. These accumulate in a hypothetical account, growing until retirement, allowing employees to track their retirement benefits much like a savings account. This formula impacts financial outlook by providing predictable growth tied to service and pay(National_Grid_2023_Niag…).

For employees at National Grid, what are the specific rights and options available during the pension benefit application process? How do these rights protect the interests of individual employees and ensure they receive fair treatment under the Niagara Mohawk Pension Plan?

Pension Benefit Application Process: National Grid employees must apply for their pension benefits by submitting the required forms at least 90 days before retirement. Spousal consent is required if opting for any form of payment other than the default. This ensures employees understand and select the best payment option for their circumstances, protecting their interests under the Niagara Mohawk Pension Plan(National_Grid_2023_Niag…).

Given the different types of credits that contribute to the pension benefit for employees of National Grid, how are Pay-based Credits and interest credits calculated? What strategies might Niagara Mohawk Power Corporation employees employ to maximize these credits before retirement?

Pay-based and Interest Credits Calculation: Pay-based credits are determined by years of service, starting at 4% of pay and increasing to 8% after 20 years. Interest credits are based on an annual interest rate tied to the Treasury securities and corporate bond rates. Employees can maximize these credits by continuing to work and contributing to their pension balance(National_Grid_2023_Niag…).

How do pension benefits work for Transition Group Employees specifically within National Grid's framework, and what unique provisions apply to them under the Pension Plan as compared to regular employees of Niagara Mohawk Power Corporation?

Pension Benefits for Transition Group Employees: Transition Group Employees under the National Grid Pension Plan have benefits calculated using both the former final average pay formula and the cash balance formula, with the greater benefit being paid out. This differs from regular employees who only receive benefits calculated under the cash balance formula(National_Grid_2023_Niag…)(National_Grid_2023_Niag…).

What are the repercussions for National Grid employees in terms of benefit loss or limitation if they have not met the Vesting requirements under the Niagara Mohawk Pension Plan? How can understanding these repercussions influence an employee's decision-making regarding their career and retirement?

Impact of Vesting Requirements: Employees must complete three years of service to become vested in the Niagara Mohawk Pension Plan. If they leave before vesting, they lose all accrued pension benefits. Understanding vesting requirements is crucial for career and retirement planning, as it ensures employees retain their pension benefits if they meet the criteria(National_Grid_2023_Niag…).

As a current employee at National Grid, what does the termination of the Pension Plan imply for accrued benefits under the Niagara Mohawk Pension Plan? Specifically, how do federal protections through ERISA and the Pension Benefit Guaranty Corporation come into play for employees seeking assurance regarding their retirement funds?

Termination of Pension Plan and Federal Protections: If the Niagara Mohawk Pension Plan is terminated, accrued benefits are protected by ERISA and insured by the Pension Benefit Guaranty Corporation (PBGC). Employees can feel assured that their benefits will be secured up to the PBGC's limits in case of plan termination(National_Grid_2023_Niag…).

How does the National Grid Pension Plan accommodate the unique situations of employees during times of disability or military service, and what steps should Niagara Mohawk Power Corporation employees take to ensure their benefits continue during these periods?

Disability and Military Service: Niagara Mohawk employees receive service credits during periods of disability or military leave, ensuring continuous pension accrual. Employees should ensure their disability or military status is properly documented with the company to avoid interruptions in their pension benefits(National_Grid_2023_Niag…).

When considering the various forms of pension payments available to retirees from National Grid, what are the potential advantages and disadvantages of choosing an annuity versus a lump-sum payment for employees from Niagara Mohawk Power Corporation?

Annuity vs. Lump-Sum Payment: Retirees at National Grid have the option to choose between an annuity, providing a steady income for life, or a lump-sum payment. The annuity provides financial stability, while a lump sum offers flexibility. The choice depends on individual financial needs and retirement goals(National_Grid_2023_Niag…).

For those looking to gain further clarity on the nuances of the Niagara Mohawk Pension Plan, what are the most effective ways for employees to contact National Grid for assistance? How can engaging with the Pension Service Center enhance an employee's understanding of their benefits and rights?

Contacting National Grid for Pension Assistance: Employees seeking more information about their Niagara Mohawk Pension Plan can contact the National Grid Pension Service Center or use the online pension modeler. Engaging with the Pension Service Center provides personalized guidance, helping employees understand their benefits and make informed decisions(National_Grid_2023_Niag…).