Tax-efficient wealth transfer using FLPs

A family limited partnership (FLP) can be an effective estate and income tax-planning tool when properly structured. By forming an FLP to hold a family business, real estate, investments or other assets and transferring the FLP interests to family members, you can remove the value of those assets from your taxable estate. These transfers may be shielded (in whole or in part) by the federal gift and estate tax exemption ($15 million in 2026).

Properly structured FLPs also enable income shifting. Because FLPs are pass-through entities for income tax purposes, income is taxed at the individual partner level. Allocating FLP income to family members in lower tax brackets can significantly reduce overall tax liability.

How divorce impacts business ownership and taxes

Dividing a business during a divorce can seem complicated, but the tax implications may be more manageable than expected. In many cases, business interests transferred between spouses as part of a divorce settlement can be done without triggering federal income or gift taxes. The spouse receiving the interests assumes the existing tax basis (for determining future gain or loss) and the holding period.

This favorable tax treatment generally applies to transfers made before, during or within one year after the divorce is finalized. Keep in mind that if the business interest is later sold, any gain will be taxable.

Avoid surprises with the “kiddie tax”

The “kiddie tax” is a tax rule that many families overlook. It applies not just to children under 18 but also to dependents who’re 18 at the end of the year and full-time students ages 19 through 23 who don’t provide more than half of their own support.

When the kiddie tax rule applies, a child’s unearned income — such as interest, dividends and capital gains — above certain annual thresholds ($2,700 for 2026) is taxed at the parents’ higher rate. Earned income isn’t affected.

Don’t transfer investment assets to a child or realize gains in a child’s taxable account without factoring in the potential kiddie tax impact. Otherwise, you could be in for an unpleasant tax surprise.

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