A Family Limited Partnership (FLP) is a partnership formed by family members to own and manage assets together. It generally has at least one general partner and one or more limited partners. The general partner manages the partnership and is responsible for its operations, while limited partners typically act as passive investors. Families may use an FLP to pool investments, hold real estate, or provide centralized management for family businesses. Once the partnership is funded, interests in the FLP can be transferred or gifted to family members, making the structure useful for both asset management and long-term wealth transfer planning.
Families generally use FLP Estate Planning for two related reasons: control and wealth transfer. First, the partnership centralizes ownership and management. Rather than giving family members direct ownership of individual assets, senior family members can transfer interests in the FLP while the general partner continues managing the partnership. Second, FLP interests may qualify for Valuation Discounts, which can reduce the value of taxable gifts and allow more wealth to be transferred during life. The partnership agreement can also place limits on transfers, helping protect family assets from poor financial decisions, divorcing spouses, or other risks affecting individual family members.
A Family Limited Partnership Valuation may reflect discounts when a transferred interest is worth less than its proportionate share of the partnership’s underlying assets. A Lack of Control Discount may apply when a limited partner cannot control distributions, investments, or other major partnership decisions. A Lack of Marketability Discount may apply because privately held FLP interests can be difficult to sell and do not trade on a public market. These discounts are not automatic. Their size depends on the rights attached to the interest, transfer restrictions, the partnership’s assets, and other facts that affect what a willing buyer would reasonably pay.
The IRS may challenge a Family Limited Partnership when the facts suggest it was created primarily for tax benefits, lacks a legitimate and significant nontax purpose, or was not operated as a genuine partnership. The IRS may also examine whether the senior family member retained possession, enjoyment, income rights, or other rights over transferred property that could trigger estate inclusion under IRC §2036. To help defend the structure, taxpayers should document legitimate nontax reasons, complete genuine transfers, follow partnership formalities, and administer the FLP consistently with its agreement.
A defensible FLP starts with a properly drafted partnership agreement and a clear purpose for creating the entity. Family members should identify the assets to contribute, establish general and limited partner interests, and document each contribution and transfer. After formation, the partnership should operate separately from the partners. That means maintaining its own records and accounts, following the partnership agreement, documenting distributions, and respecting each partner’s ownership rights. Personal expenses should not be mixed with partnership funds. Gifts of partnership interests should be documented and, when appropriate, professionally valued. Ongoing tax and legal advice can help keep the structure consistent with its stated purpose.
What types of assets can be held inside an FLP?
An FLP can hold investments, real estate, interests in family businesses, and other assets appropriate for shared ownership and long-term management. Personal-use assets may be less suitable, particularly when their use or control could undermine the partnership’s intended tax or estate-planning objectives.
What separates a family limited partnership from a family LLC?
An FLP typically has general and limited partners. The general partner manages the partnership, while limited partners generally hold ownership interests with fewer management rights. A family LLC usually uses members and managers, with governance and liability protections determined by its operating agreement.
Can FLP interests be gifted using the annual exclusion?
FLP interests may be gifted annually, potentially using the federal annual gift tax exclusion when the transfer qualifies as a present interest. Proper valuation, documentation, and compliance with partnership and tax requirements are important to support the intended estate and gift planning strategy.
What happens to an FLP when the senior generation dies?
An FLP does not necessarily terminate when a senior family member dies. The partnership agreement and applicable state law generally determine whether the entity continues, ownership interests transfer to heirs or trusts, or other succession provisions apply to the deceased partner’s interest.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Jonathan Swartz, partner in Bennett Thrasher’s Trusts & Estates Planning, or call us at 770.396.2200.
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