## What is a Family Limited Partnership?
A Family Limited Partnership (FLP) is a legal entity created to hold family assets—typically investments, real estate, or business interests. The partnership structure offers unique advantages for wealth transfer, asset protection, and family governance.
How FLPs Work
An FLP has two classes of partners: - General Partners (GPs): Control the partnership and make management decisions - Limited Partners (LPs): Own economic interests but have no management control
Typically, parents serve as general partners (or control a GP entity), while gradually transferring limited partnership interests to children or trusts for their benefit.
Wealth Transfer Benefits
Valuation Discounts
Limited partnership interests often qualify for valuation discounts because they: - Lack marketability (can't be sold on a public exchange) - Lack control (LPs can't make management decisions)
Combined discounts of 25-40% are common, meaning a $1 million gift of LP interests might only use $600,000-$750,000 of gift tax exemption.
Annual Gifting
Parents can make annual gifts of LP interests using their gift tax exclusion ($18,000 per recipient in 2026), gradually transferring wealth without using lifetime exemption.
Estate Freeze
By transferring LP interests at current values, future appreciation passes to the next generation outside the parents' estate.
Asset Protection
Assets held in an FLP have some protection from creditors of individual partners: - Creditors typically can only obtain a "charging order" against partnership distributions - They cannot force liquidation or access underlying assets directly - This protection varies significantly by state
Family Governance
FLPs can serve as a vehicle for family financial education and governance: - Regular partnership meetings engage the next generation - Partnership agreements can include provisions about distributions and management succession - Creates a framework for discussing family wealth
Requirements for Legitimacy
The IRS scrutinizes FLPs closely. To withstand challenge:
- The FLP should have legitimate non-tax purposes (asset protection, family governance, consolidated management)
- Maintain separate accounts, hold annual meetings, document decisions
- Don't commingle personal and partnership assets
- Partnership operations should make economic sense
Common Mistakes to Avoid
- Forming an FLP on a deathbed (timing issues)
- Failing to maintain formalities
- Using partnership assets for personal expenses
- Retaining too much control as GP
- Ignoring state law requirements
Alternatives to Consider
- LLCs: Similar benefits with simpler administration in many states
- Intentionally Defective Grantor Trusts (IDGTs): Different mechanism for similar goals
- GRATs: More mechanical approach to transferring appreciation
Is an FLP Right for Your Family?
Consider an FLP if you: - Have significant investable assets or real estate - Want to begin transferring wealth while maintaining control - Are looking for a governance structure for family assets - Have multiple generations who will benefit from the structure
The complexity and costs (legal, accounting, appraisal) mean FLPs are typically most appropriate for families with $5 million or more in transferable assets.