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Exploring Family Limited Partnerships and Limited Liability Companies: A Guide for USG Corporation 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 USG Corporation 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 USG Corporation 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 USG Corporation 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

How does the retirement plan structure at USG Corporation impact both final average earnings participants and cash balance participants, especially regarding their eligibility and benefits accrued over time? In what ways does the differentiation between these two categories influence the retirement outcomes for employees of USG Corporation?

Retirement Plan Structure: USG Corporation's retirement plan differentiates between Final Average Earnings Participants and Cash Balance Participants. Final Average Earnings participants, who joined before January 1, 2011, accrue benefits based on their final average earnings and years of service, which can result in higher benefits for longer-serving employees. Cash Balance participants, who joined after January 1, 2011, have their benefits calculated based on a cash balance account, which grows with contributions and interest credits. These differences affect retirement outcomes, as Final Average Earnings participants may see higher pension payments if they have longer service or higher wages, while Cash Balance participants have more predictable but potentially lower benefits based on their account balance(USG Corporation_Retirem…).

USG Corporation's Retirement Plan allows for different age-specific rules regarding early retirement. How do the "Rule of 90" and "Rule of 82" affect the financial planning of employees considering an early retirement option, and what should they consider regarding their long-term financial security?

Rule of 90 and Rule of 82: The "Rule of 90" allows employees to retire early without a reduction in benefits if their age plus years of service total 90, provided they retire at or after age 62. The "Rule of 82" permits early retirement with reduced benefits for those whose age and years of service total 82. Employees planning early retirement must consider these rules as they directly affect the amount of benefits they receive, making it important to assess how long-term financial security will be impacted, especially if they retire before age 62(USG Corporation_Retirem…).

Could you elaborate on the process through which employees at USG Corporation can change their beneficiaries within the retirement plan? What steps need to be taken, and what are the implications of these changes on the benefits received upon the participant's death?

Changing Beneficiaries: To change beneficiaries, USG Corporation employees must contact Your Benefits Resources™, where they can designate a primary and contingent beneficiary. If married, the spouse must provide notarized consent to name a different primary beneficiary. The process involves completing a form, and any changes affect who receives benefits upon the participant's death. Failing to update the beneficiary could result in benefits being paid to unintended individuals(USG Corporation_Retirem…).

As part of the retirement process at USG Corporation, how are pensionable earnings calculated? What factors are included in this determination, and how might they vary among different employees based on their roles within the organization?

Pensionable Earnings Calculation: Pensionable earnings at USG Corporation include regular pay, shift differentials, and bonuses but exclude items like nonqualified deferred compensation, severance, and stock awards. These earnings are used to calculate benefits based on formulas that take into account an employee’s service years and earnings over the 36 highest consecutive months of the last 15 years of participation(USG Corporation_Retirem…).

How does the automatic enrollment in the USG Corporation Retirement Plan work, and what options do employees have if they initially chose not to participate? What implications might this have for their retirement savings strategy?

Automatic Enrollment and Opting In: Employees at USG Corporation are automatically enrolled in the retirement plan unless they choose to opt out. If employees decide not to participate initially, they can enroll later by contacting Your Benefits Resources™. Failure to participate from the start could result in lower retirement savings due to fewer years of contributions(USG Corporation_Retirem…).

In the context of USG Corporation, what are the potential tax consequences for employees withdrawing their retirement benefits, especially regarding the mandatory withholdings? How might employees effectively manage these tax liabilities when planning for retirement?

Tax Consequences of Withdrawals: Employees withdrawing their retirement benefits from USG Corporation will face mandatory federal income tax withholdings, typically 20% for lump sum distributions, unless the distribution is rolled over into an IRA. Employees must plan for these taxes when withdrawing to avoid unexpected liabilities and ensure they maximize their after-tax retirement income(USG Corporation_Retirem…).

How do employees at USG Corporation access the necessary documents related to their retirement benefits, and what is the process for obtaining copies of these documents if needed? What are the responsibilities of the Plan Administrator in this process?

Accessing Retirement Documents: Employees can access documents related to their retirement benefits through Your Benefits Resources™ online or via phone. If additional copies are needed, employees can request them from the Plan Administrator for a small fee. The Plan Administrator oversees ensuring these documents are provided to participants as required by ERISA(USG Corporation_Retirem…).

What unique provisions exist for USG Corporation employees who experience a break in service? How do these provisions impact their accumulated benefit service and overall benefits upon reemployment?

Break in Service Provisions: USG Corporation allows employees who experience a break in service to retain their accumulated benefits if they are reemployed within one year. If reemployed after one year, their previous service may not count toward future benefits unless they were vested prior to termination. This can affect the total benefits an employee accrues if they leave and later return(USG Corporation_Retirem…).

What options do employees of USG Corporation have for managing their benefits if they return to work after retirement? How does this affect their pension benefits and the overall strategy for maximizing retirement income?

Returning to Work After Retirement: Employees returning to work after retirement at USG Corporation will have their pension payments suspended and recalculated based on additional years of service. This recalculation takes into account prior payments, meaning employees should consider the impact of returning to work on their long-term pension strategy(USG Corporation_Retirem…)(USG Corporation_Retirem…).

How can employees of USG Corporation contact their Benefits Resourcesâ„¢ for more information on their retirement plan options? Are there specific channels preferred for different types of inquiries, and what resources are available to assist them?

Contacting Benefits Resources™: Employees can contact Your Benefits Resources™ via the web or a toll-free number to inquire about retirement plan options. Different inquiries, such as changes to beneficiaries or requesting benefit estimates, can be handled through these channels. Resources such as detailed benefit estimates are available to help employees plan for retirement(USG Corporation_Retirem…).