A few weeks ago my friend, Clay Geittmann of Gonnella & Sullivan -- estate-planning lawyers right here in downtown Jackson -- helped me with an article on selecting and setting up the perfect business entity to implement your billion dollar money-making idea. It’s hard to keep a good man down. Clay enjoyed the process so much that he couldn’t wait to do it again. Clay provided the groundwork for the following commentary on an entity which some of you may have heard about recently -- the Family Limited Partnership. As with the last article, keep in mind that it was me who thought of all the witty and brilliant stuff you are about to read.

        Limited partnerships have been around for eons, but until recently they have been used sparingly as a business entity, and mostly in connection with real-estate deals. That is now changing dramatically. With all the newly created wealth in this country, Family Limited Partnerships have taken on favored child status among estate planning attorneys as yet one more terrific tool for separating you from your hard-earned dough (just kidding folks).

        What is a family limited partnership? Let’s start with some basics. A partnership is created when two (or more) persons carry on a business and share the profits and losses. Although each partner may have different responsibilities, in the typical partnership each partner has an equal say in the management of the business (sounds just like married life, doesn’t it).

        A limited partnership consists usually of one or two general partners, and any number of limited partners. The general partners have full responsibility and control in managing the business of the limited partnership, and the limited partners have no say whatsoever (or maybe this is what sounds just like married life).

        Why would anyone is his or her right mind want to be a limited partner? Because a limited partner has limited liability from all creditors of the business. The limited partner’s liability is restricted to the actual dollar investment made by the limited partner -- just like a shareholder in a corporation. And there are typically a number of very beneficial tax advantages, including the ability to pass your share of the profits or losses through to your personal income tax return (allowing you to get taxed on your income only one time), tax benefits for people who own highly appreciated property, and no self-employment taxes.

        So what about a family limited partnership? It typically involves (1) a mom and dad with a business, or a piece of real estate, or securities, and (2) a desire to begin gifting a portion of their estate to the children without having to give up control and without having to pay Uncle Sam as a result of the transfer to the kids.

        Among the better candidates for creating a family limited partnership is the family which is asset rich and cash poor, such as the typical modern day ranching family in Western states. Under our tax system, many ranching families are forced to sell off a little bit of their property at a time (or create humongous subdivisions) to pay estate taxes. A family limited partnership may ease the tax bite.

        It is common for highly valued property to be placed into the limited partnership. Since the limited partners have no control in the management of the business or assets, the value of their ownership interest is typically discounted anywhere from 15 or 50 percent. This doesn’t sound like such a good thing, I hear you saying to yourself. But it is because it allows Mom and Dad to transfer to their deserving sons and daughters an asset worth, let’s say, $15,000, but have it treated and taxed as if it were only worth $10,000. For gift tax purposes, Mom and Dad can give their little darlings almost twice as much bang for the buck.

        The best part is that the general partners (e.g., Mom and Dad) can actually own a minimal percentage of the partnership interests, yet control 100 percent of the action!

        The Family Limited Partnership has a host of other benefits as well, not the least of which is preventing the transfer of a family member’s interest in the event of a divorce, or in the event that one of those ambulance-chasing lawyers should sue your little Johnny for no legitimate reason.

        Consult your friendly and courteous estate-planning lawyer for future details.