Family Partnerships Explained: How to Build A Legacy
By John McNicholas
Published on: October 14, 2024
Estate planning is the process of passing on assets to the next generation most efficiently.
It’s often considered preparation for incapacity or death, which can cause individuals to leave their planning until later in life or until they become unwell.
Passing assets to your heirs can be far more effective the earlier you start planning.
When we first begin the discussion around estate planning, we repeatedly hear a mix of the same concerns from our clients. These are:
- tax
- distribution of assets – children receiving too much/too little
- children not being able to manage their inheritance/lack of financial literacy
- timing of receiving inheritance – too early or too late
- preserving wealth long term
A Family Partnership addresses all of these concerns.
This article explores how family partnerships work, who they are best suited for, their key benefits and potential challenges.
What Is a Family Partnership?
When it comes to estate planning, wealthy families in Ireland often seek strategies to pass down assets to the next generation efficiently.
A Family Partnership is a sophisticated legal structure that operates under a partnership agreement. Family members act as partners with varying ownership interests.
Typically, the family head or the older generation (parents) act as general partners, while younger family members (children or grandchildren) are limited partners.
The general partners (parents) of the partnership maintain control over the partnership’s assets and decisions.
The limited partners (children) hold the majority ownership stakes, benefiting from income or asset appreciation without controlling day-to-day management.
What’s the purpose of a Family Partnership?
A family partnership facilitates the gradual transfer of wealth, offers asset protection, and reduces the family’s tax burden.
Family partnerships are particularly suited to families with substantial estates (€1 million+). They present a range of advantages, though they require careful consideration and professional guidance.
What are the advantages of a family partnership?
There are several benefits to establishing a family partnership, including:
- Reduces Capital Acquisitions Tax liabilities
In Ireland, Family Partnerships are taxed on a look-through basis. Children typically own 90% of the equity in the Partnership, and therefore, 90% of the future profits accrue directly to them.
This has the effect of ‘freezing’ the value of your estate for Inheritance Tax purposes, and it begins the process of passing over assets to your children.
- Allows parents to maintain control over assets within the partnership
While children generally own 90% of the assets in the partnership, the parents hold the majority voting rights. Parents maintain control over how the partnership is run and how the assets within the partnership are managed.
- Assists with educating children on finances and managing assets
As the assets are still in the parents’ control within the partnership, there is an opportunity to educate and prepare the children for their inheritance over time. This alleviates parents’ worries about children inheriting assets too early or while they are less financially savvy.
- A collaborative way of passing wealth to the next generation
Over time, children can become involved, learn about asset management and tax liabilities, and become more financially aware.
How is a Family Partnership Structured?
A family partnership involves family members becoming partners in investing the family’s assets.
A partnership is typically structured so the parents hold 5% equity, and the remaining 90% is distributed among the children.
This split demonstrates that parents have retained a commercial interest in the arrangement but allows the majority of the assets to appreciate in the children’s names.
The parents maintain control over the assets through weighted voting rights.
They hold the majority of the voting rights and, therefore, reserve ultimate control of decision-making for the partnership.
What’s the difference between a trust and a family partnership?
A family partnership allows family members to co-own and manage assets.
General partners retain control over decisions, and limited partners benefit from ownership without management responsibility.
It’s ideal for maintaining control while transferring wealth.
In contrast, a family trust involves a trustee who manages assets on behalf of beneficiaries, offering protection and flexibility in distributing assets over time.
Trusts are generally less hands-on for beneficiaries, whereas partnerships offer more involvement in management decisions.
Who Should Consider a Family Partnership?
Generally, a family partnership is suitable for people seeking estate planning who understand and accept the initial cost and work required to set it up for the longer-term benefits.
The younger all parties are, the better.
To maximise the benefits of the process, the parents should be under 65 and have sufficient wealth to cover their own lifetime needs.
This would mean they have no debt, and each has a good pension fund.
Establishing a Family Partnership
Your Financial Adviser will help you to determine whether a Family Partnership is the correct estate planning tool for your family.
Once this has been decided, we recommend engaging an experienced family lawyer who understands Irish tax and legal matters.
While not a statutory requirement, the Family Partnership should have a formal partnership agreement that outlines contributions, profit distribution, decision-making, and dispute resolution mechanisms.
Your Family Lawyer will draft your Family Partnership agreement, and often, families also take this opportunity to draft wills, enduring powers of attorney, and advance healthcare directives.
If a partnership trades under a name other than the individual partners’ names, it must be registered with the Companies Registration Office (CRO) under the Business Names Act.
Any children who are currently minors do not have the legal capacity to become partners in the partnership.
Therefore, it will also be necessary for the parents to be appointed as their trustees and to hold their partnership share upon a bare trust for their benefit until they reach the age of 18.
Once the partnership is established, it is advisable to engage an accountant to ensure compliance with tax filing and account requirements.
How are assets passed into a family partnership?
A gift of cash or an existing investment, a loan, or a combination of these may fund a Family Partnership.
Capital Acquisitions Tax (CAT) at 33% will arise for children if they receive a gift or inheritance over their tax-free threshold amount; see further details here.
However, it is often still beneficial for parents to give the inheritance to children and pay the tax.
This allows the assets to grow in the children’s name.
If the parents retain the assets and gift them to the children in the future, when the assets have appreciated, the tax bill will be greater.
When parents gift their assets to the partnership, it is deemed a disposal of the asset, and capital gains tax (CGT) may be due.
Where CAT and CGT liabilities arise on the same event, there may be an opportunity for an offset credit against the CAT which will half the overall family tax bill.
Parents can advance a loan as an alternative to making a gift to the Family Partnership.
Generally, our preferred approach, a loan, achieves two substantial benefits for the family.
The first is that the parents still have access to all the capital, as the loan can be repaid at any time.
A loan can also be repaid in instalments to the parents, which can comprise repayments of capital and, therefore, serve as a tax-free income for the parents in the future.
Moving other assets, such as rental properties, into the Family Partnership is also possible.
What are the ongoing obligations of a Family Partnership?
As set out in the partnership agreement, each partner has a specified share in the investment account’s profits.
All partnership members, including minors, must file a yearly tax return.
Unaudited partnership accounts consistent with partnership agreements and trust deeds must also be prepared annually. Your accountant will assist with these.
While not usually required, it is good practice for families to hold regular meetings to discuss the partnership’s performance, key decisions, and long-term goals.
Parents may wait until their children turn 18 to include them in these meetings. These meetings are an opportunity for parents to educate their children about their inheritance.
What are the challenges of a family partnership?
The main challenge with a family partnership is the initial work required to establish the partnership.
Due to the structure’s complexity, the partnership’s initial setup requires significant legal and administrative work. This can take some time, and there are costs associated with this work.
Transferring assets to the children can also trigger initial tax liabilities, and the parents should be equipped to deal with this.
This is why we suggest a minimum of circa €1 million to fund the partnership initially to justify the costs and work.
Once established, there are ongoing obligations to the partners, but the work involved is less burdensome.
Why do we recommend Family Partnerships at Everlake?
A Family Partnership is hugely beneficial in the correct circumstances.
90% of the growth of the partnership’s investments will accrue to the children rather than to the parents.
Therefore, a family will save 33% CAT on 90% of future investment returns on capital.
Parents retain control over the investment decisions, even once the children are over 18.
This cannot be achieved outside of a partnership structure once the assets have been given to the children.
The only option aside from a Family Partnership is to retain the assets in the parent’s name, which results in losing the tax advantage of giving assets earlier.
Parents can also retain access to investment capital through loan repayments from the Family Partnership and, if necessary, recall loans from the partnership.
Family partnerships can also be inter-generational and be received to include grandchildren and other family members.
Conclusion
Family partnerships offer wealthy families in Ireland a powerful estate planning tool that balances control, flexibility, and tax efficiency.
They provide a structured way to manage wealth and preserve family legacies by allowing assets to be passed to the next generation while maintaining oversight.
However, seeking expert advice is essential before setting up a family partnership due to their complexity and the potential for legal, tax, and family challenges.
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