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Exploring Family Limited Partnerships and Limited Liability Companies: A Guide for Windstream Holdings 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 Windstream Holdings 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 Windstream Holdings 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 Windstream Holdings 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 are the implications of the Windstream Pension Plan for employees who wish to retire early, specifically regarding the eligibility criteria and benefit calculations that will affect their financial planning? How does Windstream address concerns for employees who may be contemplating retirement before reaching the defined Normal Retirement Age of 65?

Early Retirement and Financial Planning: Employees may retire early at age 55 with 20 or more years of service, though the pension benefit will be reduced. The reduction is by 1/180th for the first 60 months and 1/360th for each of the next 60 months that commencement precedes the normal retirement date of age 65. This ensures early retirees can still receive benefits, though at a lower amount than if they had waited until age 65(Windstream_Pension_Plan…).

In what ways does the Windstream Pension Plan protect the interests of employees during a potential plan termination? Specifically, how does the plan ensure that accrued benefits are preserved and what procedures are in place to inform employees about their rights under the Employee Retirement Income Security Act of 1974 (ERISA)?

Plan Termination Protections: In the event of plan termination, Windstream ensures all accrued pensions are fully vested. The plan assets will be used exclusively to meet accrued pension obligations before any surplus may revert to the company. Participants are also protected by the Pension Benefit Guaranty Corporation (PBGC), which guarantees most pension benefits(Windstream_Pension_Plan…).

How does Windstream determine the necessary contributions to the Pension Plan, and what role does an independent actuarial assessment play in this process? Additionally, how does this funding approach impact the overall financial stability of the Windstream Pension Plan and the benefits it promises to its participants?

Contribution Determination and Actuarial Role: Windstream’s contributions to the pension plan are determined by an independent actuary who evaluates the plan annually to recommend adjustments based on experience. This approach ensures that the plan remains financially stable and capable of meeting its promised benefits(Windstream_Pension_Plan…).

What options are available to employees of Windstream regarding the forms of pension benefit payouts upon retirement, and how do these options like the Joint and Survivor Annuities differ in terms of financial implications for both the retiring employee and their spouse?

Benefit Payout Options: Windstream offers several pension payout options, including Joint and 100% Survivor Annuity, Joint and 50% Survivor Annuity, and a 10-Year Certain and Life Annuity. These options differ in terms of the benefit reduction applied to ensure payments continue for the life of the spouse, impacting both the retiree’s and the spouse’s financial planning(Windstream_Pension_Plan…).

How should Windstream employees approach the process of claiming pension benefits, especially if their claims have been denied? What recourse is available for employees who are facing issues with their pension claim and wish to understand their rights and the appeal process?

Claiming Pension Benefits and Denied Claims: If an employee's pension claim is denied, they will receive a written notice explaining the reasons for the denial and the specific plan provisions involved. Employees may appeal the decision within 60 days, and the appeal process must be completed within 60 days of the request, with the right to file a civil lawsuit if necessary(Windstream_Pension_Plan…).

Given the frozen status of the Windstream Pension Plan, what should employees understand about their service years and how these years contribute to their pension benefits? How does Windstream communicate these rules to ensure clarity among its employees?

Service Years and Frozen Status: Since the Windstream Pension Plan is frozen, no additional benefits accrue after December 31, 2007. However, employees continue to earn years of service, which count toward eligibility for early retirement and vesting. Windstream provides clear communication through its summary plan description and resources to ensure employees understand these rules(Windstream_Pension_Plan…).

What strategies can Windstream employees employ to maximize their pension benefits and ensure they are making informed decisions about their retirement? How does Windstream support its employees in accessing the necessary resources and information to facilitate effective retirement planning?

Maximizing Pension Benefits: Employees are encouraged to consider their timing of retirement carefully, as delaying retirement closer to the normal retirement age of 65 reduces benefit reductions. Windstream supports retirement planning through its pension resources and access to Merrill Service Representatives who can assist with planning tools(Windstream_Pension_Plan…).

How does Windstream ensure that employees are aware of their obligations under the plan regarding the filing of claims and maintaining updated personal information? What measures does the company take to keep communication channels open for any inquiries or updates employees might need?

Maintaining Updated Information: Windstream emphasizes the importance of keeping personal information up to date, including changes to contact information. Employees are responsible for filing claims in a timely manner, and failure to do so may result in delays or forfeiture of benefits(Windstream_Pension_Plan…).

In the event of the death of a vested Windstream employee, what benefits are guaranteed to eligible spouses under the plan, and how do survivors initiate the process for claiming these benefits? What steps should surviving spouses take to ensure they receive the necessary support and information from Windstream?

Survivor Benefits and Claim Process: In the event of the death of a vested employee, the spouse is entitled to receive a pre-retirement survivor annuity, which may start on or after the employee’s earliest retirement age. The spouse must contact Windstream to initiate the claim process and may receive a lump sum if the benefit’s present value is below certain thresholds(Windstream_Pension_Plan…).

How can Windstream employees reach out to the companyâ€™s Benefits Committee or Plan Administrator for detailed inquiries about their pension benefits? What contact methods are available, and what information should employees prepare to facilitate effective communication regarding their pension inquiries? These questions will help employees navigate the complexities of the Windstream Pension Plan and ensure they are well-informed as they approach retirement.

Reaching the Benefits Committee: Windstream employees can contact the Benefits Committee or Plan Administrator at Windstream Services, LLC in Little Rock, Arkansas, or via the Merrill Service Center at 1-800-228-4015. Employees should have relevant information, such as personal and employment details, ready to facilitate efficient communication(Windstream_Pension_Plan…).