Understanding Family Limited Partnerships (FLPs)

Important Note

This information is for educational purposes only. Our firm does not provide legal, tax, or accounting advice. This guide should not be considered legal, tax, or accounting advice. Please consult with qualified professionals about your specific situation before implementing any estate planning strategies.

What Is a Family Limited Partnership?

A Family Limited Partnership (FLP) is a business entity owned by family members that combines asset protection, estate planning, and wealth transfer benefits. By holding family assets within a partnership structure, you can transfer wealth to younger generations at discounted values while maintaining control and protecting assets from creditors.

Think of an FLP as a family holding company. You put investments, real estate, or business interests into the partnership, keep control through a small general partnership interest, and transfer limited partnership interests to children or grandchildren at values that reflect discounts for lack of control and marketability. It’s like giving away slices of a pizza while keeping the right to decide when and how to serve it.

How FLPs Work

The Basic Structure

General Partners (GP):

Limited Partners (LP):

The Process

  1. Create the partnership with family members
  2. Transfer assets to the partnership
  3. Parents keep GP interest (control)
  4. Gift or sell LP interests to children
  5. Apply valuation discounts to LP interests
  6. Transfer wealth at reduced tax cost

The Power of Valuation Discounts

The primary tax benefit of FLPs comes from valuation discounts:

Lack of Control Discount

Limited partners cannot:

Result: LP interests are worth less than underlying assets Typical discount: 15-30%

Lack of Marketability Discount

LP interests cannot be:

Result: Further reduction in value Typical discount: 20-35%

Combined Discounts

Total discounts often 25-45%:

Estate Planning Benefits

Wealth Transfer at Discount

Transfer more wealth with less tax:

Maintain Control

Parents keep GP interest:

Freeze Estate Values

Lock in current values:

Facilitate Annual Gifting

Annual exclusion gifts of LP interests:

Asset Protection Benefits

Protection from LP Creditors

Limited partners’ creditors face restrictions:

Protection for Family Wealth

Family assets in FLP:

Professional Liability Protection

For doctors, lawyers, business owners:

Types of Assets for FLPs

Best Assets

Marketable Securities:

Real Estate:

Family Business Interests:

Alternative Investments:

Assets to Avoid

Retirement Accounts:

Personal Residence:

S Corporation Stock:

Creating an FLP

Formation Steps

  1. Draft partnership agreement with attorney
  2. File with state (if required)
  3. Transfer assets to partnership
  4. Obtain EIN from IRS
  5. Open partnership bank/brokerage accounts
  6. Maintain proper records
  7. Make initial gifts of LP interests (if desired)

Partnership Agreement Provisions

Key terms include:

Professional Team

You’ll need:

Valuation Requirements

Appraisals

For gift/estate tax purposes:

Factors Affecting Discounts

Larger discounts when:

Smaller discounts when:

IRS Scrutiny

Be prepared:

Gift and Estate Tax Integration

Lifetime Gifting

Annual exclusion gifts:

Lifetime exemption gifts:

At Death

Remaining interests:

Stepped-Up Basis

Heirs’ tax basis:

IRS Challenges and Requirements

Business Purpose Required

FLP must have legitimate purposes beyond tax savings:

Follow Formalities

Essential practices:

Section 2036 Issues

IRS attack angle:

Recent Court Cases

IRS has won cases where:

Taxpayers win when:

FLP vs. Family LLC

Family LLC Advantages

Family Limited Partnership Advantages

Common Hybrid Approach

LLC as General Partner:

FLP Strategies

The Gradual Gifting Strategy

Annual transfer program:

  1. Create FLP with $10 million
  2. Gift LP interests annually using exclusion
  3. Over 10-20 years, transfer most LP interests
  4. Keep GP control throughout
  5. Pass remainder at death

The Discounted Sale Strategy

Sell LP interests to children:

  1. Create FLP and fund
  2. Children establish trusts
  3. Sell LP interests at discounted value
  4. Children pay with promissory note
  5. Transfer appreciation to next generation

The Freeze Strategy

Lock in current values:

  1. Parents get preferred GP interest
  2. Children get common LP interest
  3. Preferred gets fixed return
  4. All growth goes to LP interest
  5. Future appreciation transfers

The Dynasty FLP

Multi-generational planning:

  1. Create FLP for long term
  2. Transfer LP interests to dynasty trusts
  3. GST exemption allocation
  4. Spans multiple generations
  5. Massive long-term transfer

Ongoing Administration

Annual Requirements

Operational Practices

Do these:

Don’t do these:

When to Dissolve

Consider dissolution when:

Common Mistakes to Avoid

Ignoring Formalities

Most common failure:

Deathbed Planning

Too late:

Excessive Discounts

Aggressive valuations:

No Business Purpose

Can’t just be for tax savings:

Retained Enjoyment

Section 2036 trap:

Who Should Consider FLPs?

Ideal Candidates

FLPs work well for:

Less Suitable For

Think twice if you:

Professional Costs

Setup Costs

Expect to pay:

Ongoing Costs

Annual expenses:

Cost-Benefit Analysis

Worth it when:

The Bottom Line

Family Limited Partnerships remain one of the most powerful estate planning tools for wealthy families. The combination of valuation discounts, maintained control, asset protection, and flexible wealth transfer makes FLPs attractive for multi-generational planning.

The ability to transfer assets at 25-40% discounts to fair market value allows families to move significantly more wealth using the same gift and estate tax exemptions. For a family with $15 million in assets, proper FLP planning could save millions in transfer taxes.

However, FLPs require commitment to proper structure and ongoing formalities. The IRS actively challenges arrangements that lack business purpose or fail to operate as genuine partnerships. Deathbed planning and ignored formalities doom FLP tax benefits.

For families with significant wealth, willingness to maintain proper operations, and long-term transfer goals, FLPs provide unmatched benefits. The key is working with experienced professionals, documenting business purposes, following all formalities, and treating the FLP as the legitimate business entity it must be.

Done right, an FLP can protect and transfer family wealth for generations. Done wrong, it can be challenged, disallowed, and become an expensive mistake. The difference is in the details.

This guide provides general educational information about Family Limited Partnerships. FLPs are complex structures with significant legal and tax implications. IRS scrutiny is common. State laws vary. Always work with qualified estate planning attorneys, tax professionals, and appraisers before implementing an FLP strategy.