Retirement Myths Women Believe

When it comes to retirement, many women just aren’t prepared. In many cases, the problem isn’t that these women don’t understand that preparing for retirement is important, but that they’ve fallen prey to one or more common retirement myths. These myths—about how much you need to save, how long it will take and more—are making it difficult for some women to take the steps they need to prepare for life after they stop working.

Don’t Fall for These Retirement Myths

Myth #1: Social Security will be enough for me to live on when I retire. Social Security was designed as a safety net to help seniors avoid severe poverty. It was never intended to fund all of a person’s living expenses if they weren’t working. Workers who are currently retired receive an average monthly benefit of just over $1,200. Would that be enough to sustain you in retirement? For most of us, the answer is no. While you’ll likely be able to count on getting some of your retirement income from Social Security (the program faces some financial difficulties, but it’s unlikely to completely disappear any time soon), you’ll probably need other sources of income as well.

Myth #2: I still have plenty of time to save for retirement. When it comes to setting aside funds for retirement, getting started early is key. If you’re young and just getting started in your career, it can be hard to prioritize saving for a distant retirement. Other financial concerns, such as paying off student loans, may seem like a bigger priority. As you get older, buying a house and having children may take center stage. But the longer you wait to get started, the less likely it is that you’ll be able to save the amount you need to comfortably retire. Setting aside even small amounts now could pay off in a big way in the future.

Let’s say you start investing $100 a month today in an account earning 6% annually. You continue to save the same amount each month for the next 30 years. In three decades, you’ll put aside $36,000 and your investment will earn roughly $62,000, leaving you with a total of nearly $98,000. That’s obviously not enough to fund an entire retirement. But this example does show the huge financial benefit you can see from setting aside even relatively small amounts of money. Now, assume you actually increase your contribution amount each year to keep up with inflation. If you increased your contribution level by 3% each year, then you’d have $141,000 at the end of 30 years. That’s a huge increase over 30 years from just one small change – further evidence that time matters.

Myth #3: I have more important things to save for, like my kids’ college education. You have a lot of different priorities, and doing everything you can to see that your children have a secure future is certainly one of them. But you shouldn’t sacrifice your retirement security just so your children can graduate from a pricey college free of debt. Your kids can borrow money to pay for college and graduate school, but you can’t get a loan to pay for retirement. Worse, if you run out of money in your golden years, your children may end up supporting you, which is hardly the outcome you want. That doesn’t mean you can’t help your children pay for college if you can afford it, but you shouldn’t neglect your own retirement savings to do so.

Myth #4: I can’t afford to save. Life is expensive. When your budget is tight, cutting contributions to your retirement accounts may seem like a smart move. But unless things are really dire, it’s probably a better idea to keep making contributions to your 401(k) or IRA. First, as explained above, setting aside money early gives it more time to grow. By stopping retirement contributions, you’re losing out on valuable time. Second, by not saving for retirement, you could be turning down free money. If your employer matches your retirement plan contributions up to a certain percentage, try to contribute at least that amount. Failing to do so is like turning down free cash.

Myth #5: I don’t work outside the home, so I don’t need to worry about retirement. If you’re currently not in the paid workforce, retirement may not seem like something you need to worry about. But stay-at-home moms also need to think about what will happen when they get older. Some women may simply be counting on their husbands to handle all of the retirement planning, but that isn’t always a smart move. Even if you’re not actively contributing to retirement accounts, it’s still important to be involved in the retirement planning process.

In addition, if you previously worked outside the home, don’t forget about your old 401(k). Consider rolling over that account into an IRA, since that will probably give you more investment options and make it easier to make additional contributions. You can also look into strategies like a spousal IRA or, if you freelance or run a home-based business, an individual 401(k) or SEP IRA, to maximize your and your spouse’s retirement contributions.

Retirement Planning: Get Started Today

Planning for retirement is a lifelong process. By starting today, even if you’re just saving small amounts, you can increase your odds of enjoying a comfortable retirement in the future. Having trouble getting started? Consider making an appointment with a financial advisor. He or she can talk to you about your long-term goals and help you develop a retirement savings strategy that works for you. We’ve been doing this for years. If you think you need help, or if you simply have any questions, feel free to connect with us and schedule a free consultation.

Family Limited Partnership
Family Limited Partnership
Family Limited Partnership
Family Limited Partnership
Family Limited Partnership
Family Limited Partnership
Family Limited Partnership
Family Limited Partnership
Family Limited Partnership

What is a Family Limited Partnership

A Family Limited Partnership is simply a formal partnership where the partners are family members. Like other partnerships, a Family Limited Partnership (FLP) is a real business selling products, services, or renting property to real customers. The difference here is that family members are involved, and the partnership is structured to provide a number of significant tax and legal benefits for the family. The three most powerful benefits are:

  • Reduction in estate taxes
  • Preventing future growth in asset values from being estate taxed
  • Protection from lawsuits or divorce actions.

If constructed and managed correctly, the Family Limited Partnership can be a powerful tool for high-net-worth families. Interested in learning more? Schedule a meeting with one of our advisors to see if FLPs are right for your situation.

When we say there is a “real” business involved, we don’t mean that you have to start a new business. In fact, most FLPs are created to take ownership of an existing business or investment real estate. Whether you already own a manufacturing, distribution, or services company or own several real estate investments, you can transfer ownership into the FLP to take advantage of its key benefits.  

Understanding the Family Limited Partnership

Here’s how it typically works. On day one, you have an attorney create a Family Limited Partnership agreement. There needs to be at least one general partner and one limited partner, but typically, there are several limited partners. To activate the partnership, you would transfer your ownership of your business or investment real estate into the partnership in exchange for all the general and limited partnership shares. On day two, you would own 100% of the partnership, which now owns 100% of your business or investment real estate.

Here’s where the fun begins. To take advantage of the key benefits we’ve mentioned, you need to gift some or all of the limited partnership shares to other family members. This isn’t just a series of random gifts; you’re gifting shares to each family member whom you eventually want to own your assets after you’ve passed away.

You’re fast-tracking your estate plan. Instead of waiting until you’ve passed away when your heirs would receive your assets, you’re giving them away now in a manner that reduces gift and estate taxes while providing some creditor protection. To understand why you need to understand more about the difference between general and limited partners.

General vs. Limited Partnership Interests

General Partners

General partners in a Family Limited Partnership are responsible for the management of the partnerships and its assets. They control management of the partnership very similarly to how a business owner controls his or her company. The general partners have unlimited liability for debts incurred by the partnership agreement, but there are ways for general partners to protect themselves against liability. The general partners can be paid a salary just as a business owner is paid a salary.

Limited Partners

Limited partners in a Family Limited Partnership are only responsible for management duties that the general manager assigns them. They also can be paid a salary. The limited partner is not responsible for the partnership’s liabilities, and the limited partners do not have any control over the partnership. All that control stays with the general partners. These limited partners are generally the youngest family members – typically children or grandchildren.

Percentage Ownership

The responsibility and control described above is NOT affected by the percentage each partner owns. In other words, if the general partner(s) own 2% of the partnership, they still control 100% of the partnership and, therefore, 100% of the business or investment real estate in the partnership.

The limited partners could own 98% of the partnership, but they still would NOT control the partnership, nor any of the business or investment real estate in the partnership.

Sharing Profits and Cashflow

The profits of the Family Limited Partnership (after salaries and other expenses) must be shared with all the partners in the same percentage as their ownership. In our example above, the general partner(s) would control 100% but would own 2% and therefore only be entitled to 2% of the profits; the limited partners would not control anything but would own 98% and therefore be entitled to 98% of the profits.

Remember, the general partner controls who fills different management roles and which family member is paid a salary. The general partner can take a substantial salary in keeping with his/her management role.

Cashflow distributions are discretionary. The general manager determines whether a distribution will be made. This is important – and goes to the heart of the benefits we mentioned – because the limited partners are entitled to a share of profits (and have to pay income taxes on them), but the limited partners are not entitled to cash if the general partner decides he or she isn’t going to make a distribution that year.

The partnership agreement allows the general partner to keep management control over the business or real estate and to keep control over cash flow.

Advantages of Family Limited Partnership

The unique ownership structure of Family Limited Partnerships is what allows this estate planning tool to provide such powerful benefits.

In this video, Greg Welborn gives a review of some of the complexities and benefits to Family Limited Partnerships.

Tax Reduction

The FLP reduces estate and gift taxes because partnership shares are not worth the same amount. In a general corporation, one share of stock has the same fair market value as another share of stock. In a Family Limited Partnership, the general partner shares are uniquely different than the limited partner shares. The general partner shares (even just 2% ownership) are more valuable than the limited partner shares.

Think about this logically. If I told you I own a company worth $1,000,000 and want to sell 98% of it to you, you’d be willing to pay me $980,000 (98% of one million dollars). But if I told you that those 98% shares do NOT let you vote for the board of directors, do not let you fire/hire the managers of the company, and do not entitle you to any dividends or distributions, you would not pay me $980,000. You might still want to own part of this company, but you’d pay me a lot less for those shares.

A good general rule of thumb is that you’d pay roughly 60%. In other words, there would be a 40% discount in value for those shares which do not give you any control. That discount can vary, but it is a good rule of thumb.

The IRS acknowledges this economic fact. That means if you gift your kids/grandkids 98% of the Family Limited Partnership in limited partner shares, the IRS will acknowledge that you’ve made a monetary gift of roughly $588,000 (a 40% discount on $980K).

Tax laws only allow you to give away a certain amount of your net worth before estate taxes are due. If you use a FLP, you can give away almost all of a $1 million business or investment property but only use up a small amount of your lifetime estate tax exemption.

This is known as valuation discounting, and it is very powerful. If used on larger businesses or real estate, the tax savings are huge.

Preventing Future Growth From Being Taxed

This is a pretty simple concept. Once you’ve gifted the limited partner shares, they are out of your estate. No matter how large the underlying business or real estate grows, it won’t be subject to estate tax or gift tax as long as it stays within the Family Limited Partnership. This benefit can be continued for future generations if the limited partner shares are gifted to trusts for your kids instead of to the kids directly, but that’s a topic for a different article.

To understand the power of this technique, let’s assume the business or real estate grows by 6% per year. In 24 years, the $1 million value will have grown to $4 million, but there will not be any estate or gift tax on that $3 million in growth.

Creditor and Divorce Protection

The sad reality is that many civil lawsuits and divorces are not settled on their merits but instead are settled on whose lawyer is the best poker player. It’s mostly a negotiating game. If your kids are seen as “deep-pockets” with lots of cash flow coming their way, the attorney suing them is going to go for the jugular and not be motivated to settle.

On the other hand, if your child’s attorney points out that a substantial portion of your child’s net worth is limited partnership shares offering no control, no rights to liquidate, no cashflow, but potentially a substantial tax liability, well, that other attorney is more motivated to settle quickly and for less money. In fact, if structured properly, FLP shares couldn’t even be included in your child’s or grandchild’s divorce case; they would be off-limits.

The Right Structure and Right Asset Are Critical

Family Limited Partnerships are powerful tools for high-net-worth families, but not all FLPs are created equal. The key is choosing the right asset or investment real estate to be owned by the partnership. You need to balance cash flow, earnings, future growth, potential future asset sales, and a number of other factors before deciding which assets to place into a FLP. You need to carefully consider what restrictions you want to place on the limited partners to maximize the tax and creditor protections.

It all starts with a well-crafted and personally tailored wealth and estate plan. Understanding where you are now, what you want retirement to look like, and how best to achieve that are all precursors to establishing a Family Limited Partnership. We highly recommend you engage the services of a 100% objective wealth advisor – someone who qualifies as a fiduciary and is legally bound to act in your best interests – to design your family’s plan and help you implement it.

Family Limited Partnership

Recent Posts

Ready to Talk?

Let’s schedule a time to learn about your needs and retirement plans.

Ready to Talk?

Let’s schedule a time to learn about your needs and retirement plans.

Categories

Download our

Financial Planning Guides

Understanding Annuities

We are committed to helping families make wise decisions among all the competing priorities they face.

Saving for College

The sooner you start saving for college, the better positioned you will be to greet that big day with enthusiasm, not dread.

Preparing for Retirement

Retirement should be as active and rewarding, and you shouldn’t have to worry about your situation.