What is a Family Limited Partnership?

An FLP is a type of limited partnership formed by family members to hold and manage family assets. Typically, parents or grandparents will form the FLP and serve as general partners, maintaining control over the partnership’s operations. Other family members are brought in as limited partners, receiving ownership interests but having little to no control over day-to-day management and limited liability!

It's tricky, but it's awesome!

For example: Parent forms AnyNameFamily, LP and serves as the General Partner. (A GP is the one who makes all the decisions and has all the authority to operate the partnership.) He then appoints one or more of his children as Limited Partners. The Limited Partners can receive ownership in the partnership but cannot "operate" it because they are "limited" partners. Over time, Parent may increase the shares of the LPs using the annual gift exclusion (currently that's $19,000 for 2025...and will likely rise to $20,000 for 2026) or by exercising a portion of his lifetime gift exemption which is currently $13,990,000. So, for instance, if Parent is the GP and Child1, Child2 and Child3 are designated as LPs, Parent can run the partnership, slowly increase ownership interests for the LPs, provide them income from the partnership and through their estate plan designate one of them as the successor GP...for later on. In the meantime, the limited partners are not liable for anything in the partnership so their personal assets are protected from creditors should anything happen while operating the partnership's assets (like a rental property or business).

Essentially, the FLP structure allows families to:*Transfer wealth to younger generations while minimizing gift and estate taxes;*Maintain control over family assets;*Protect assets from creditors and lawsuits; and*Centralize family wealth management.

Tax Benefits:

Do it right and the benefits are great!

Estate Tax Benefits- One of the primary benefits of an FLP is the ability to transfer wealth to younger generations at a discounted value for gift and estate tax purposes. This is achieved through:

*Valuation Discounts: Limited partnership interests can often be valued at a discount due to lack of control and marketability. Discounts of 30-40% are not uncommon, allowing more wealth to be transferred tax-free.

*Annual Gifting: Parents can gift limited partnership interests up to the annual exclusion amount without incurring gift taxes. Over time, this can transfer significant wealth tax-free also.*Lifetime Exemption: Larger transfers of partnership interests can utilize the lifetime gift and estate tax exemption tax-free also. (But if you have the time necessary, it's much better to use the annual exclusion...)

Income Tax Benefits- FLPs can also provide income tax advantages, including:

*Income Shifting: Partnership income can be allocated to family members in lower tax brackets, potentially reducing the overall family tax burden. (e.g. Parent's tax bracket is likely much higher than that of his or her children, so if the income from the partnership assets is given to the children, then the overall tax on the partnership profit is reduced.)

*Expense Deductions: FLPs are able to deduct business expenses that would otherwise be non-deductible personal expenses. (e.g. Operating expenses, Management fees, Depreciation of Real Estate, Business Travel & Education, Health Insurance and other benefits and any charitable contributions.)

*Step-Up in Basis: Assets held in an FLP may receive a step-up in basis upon the death of a partner, potentially reducing capital gains taxes on future sales. (e.g. If the assets in the partnership are sold after Parent passes away, the surviving partners will not face capital gains taxes if they are sold within 9 months of Parent's passing...)

Asset Protection:

Keep your heirs involved AND safe from creditors!

A business partnership generally limits liability for the "limited partners." The children, as limited partners, are not liable for anything that happens in the business operations of the partnership. This means that if there's a slip and fall incident at a rental held by the partnership, the subsequent lawsuit cannot go after the personal assets of the limited partners. In other words, it's a great way to provide a functional gift to your heirs without giving them a future potential lawsuit or liability.

The general partner acts like the CEO of the partnership and controls the operations of the assets therein. While a GP is liable for decisions made in the partnership, insurance can go a long way toward protecting the GP from legal liability, and if an LLC is serving as the GP, the Parent can be shielded at a higher level.

Additional Tips: For an FLP to be effective, it:

1. Must Have a Legitimate Business Purpose- The FLP should have a legitimate business purpose beyond tax savings. This might include:a.) Managing a family business or investment portfolio;b.) Consolidating family assets for more efficient management; and/orc.) Protecting family assets from creditors or lawsuits.(Documenting and demonstrating this business purpose is crucial for defending the FLP structure if challenged by the IRS.)

2. Must Have Proper Formation and Operation- To maximize tax benefits and minimize risk, it’s essential to:

a.) Form the FLP correctly under state law;

b.) Transfer assets to the FLP properly;

c.) Maintain separate books and records for the FLP;

d.) Hold regular partnership meetings; and

e.) File annual tax returns for the FLP.

Stay at arm's length.

3. Must Involve Arm’s Length Transactions- All transactions between the FLP and its partners should be at arm’s length. This includes:

a.) Paying fair market value for any personal use of FLP assets (e.g. Do not allow a limited partner to live in a property for reduced rent.);

b.) Avoiding commingling of personal and FLP funds (e.g. Do not take the partnership debit card and go shopping for personal stuff.);

c.) Properly documenting all transactions (e.g. Treat the partnership just like a "real" business with non-family partners and keep good financial records.)

4. Must Retain Sufficient Assets Outside the FLP- Parent(s) should retain sufficient assets outside the FLP for their personal needs. Transferring too many assets or relying too heavily on FLP distributions can invite IRS scrutiny. (I.E. An audit and potential penalties.)

5. Must Be Careful About the Timing of Transfers- Careful consideration should be given to the timing of asset transfers and gi9fting of partnership interests. Deathbed transfers or formations are likely to be challenged... The paced transfer over time process is much, much more likely to be successful and unchallenged by regulatory authorities.

In conclusion, an FLP can be a fantastic element of an estate plan. It can be used to provide income, reduce taxes, transfer property outside of the taxable estate all while maintaining control by the General Partner(s).  There are; however, many traps that can trip up the uninformed so please involve competent legal and tax professionals in any FLP planning.

Curry Andrews, Attorney