Families use family limited partnerships for a simple reason. They want to transfer wealth while keeping control. An FLP lets you shift assets out of your taxable estate in a structured way. You stay involved in management. You also create a clear path for future ownership.
This mix of control and tax efficiency is why FLPs remain popular with affluent families.
How an FLP is organized
A family limited partnership has two types of owners. General partners manage the partnership and make decisions. Limited partners own an economic interest but have no role in day-to-day control.
This split creates a natural planning structure. Parents often serve as general partners. Children or trusts for children hold limited partner interests. The result is a clean separation between control and ownership.
Why control matters in an FLP
Control drives the value of the structure. General partners decide how assets are invested. They also choose when income is distributed. They manage accounting, record keeping, and daily operations.
Limited partners do not have any of these rights. They cannot force distributions or interfere with management. This lack of control reduces the value of limited partner interests for gift tax purposes. That reduction is often a central goal of planning with FLPs.
How valuation discounts work
The IRS recognizes that limited partners hold restricted interests. They cannot sell easily. They cannot control decisions. These limits reduce the fair market value of the interest. Appraisers apply discounts to reflect this reality.
The two standard discounts relate to lack of control and lack of marketability. The size of the discount depends on the facts. Strong documentation and a qualified appraisal matter. These discounts enable families to transfer more value while using a smaller portion of their lifetime exemption.
Use FLPs for annual gifts
Families often gift limited partner interests each year. These gifts use the annual exclusion and reduce future estate taxes. Recipients receive an interest in the partnership rather than cash. The parents keep control because the voting rights remain with the general partners. This approach lets families shift wealth slowly and predictably. It also avoids sudden changes in control or decision-making.
Use FLPs for larger lifetime transfers
Some families want to transfer significant wealth while the estate tax exemption remains high. An FLP can support this strategy. Parents can contribute assets to the partnership. They can then gift or sell limited partner interests to children or trusts. The valuation discounts reduce the taxable value of these transfers. Parents keep control as general partners. The structure also protects children by preventing premature control of significant assets.
Asset selection matters
Not every asset belongs in an FLP. Liquid investment portfolios work well. Income-producing real estate also fits. Concentrated stock positions may require added care. Personal residences or assets used by the family often cause issues. Assets should support a business purpose. They should also justify partnership administration. A thoughtful mix keeps the structure sound.
Maintain a clear business purpose
A family limited partnership must operate as a real business entity. This requirement protects the tax benefits. Common business purposes include investment management, asset consolidation, or centralized real estate operations.
Formalities matter. The partnership should keep accurate records. It should follow the partnership agreement. It should complete annual filings. Regular meetings reinforce that the FLP is an operating entity.
Avoid common mistakes
Many families stumble by treating an FLP casually. Personal expenses should never run through the partnership. Distributions must follow the agreement. Assets should not be commingled. General partners must act in a fiduciary capacity. Failure to follow these rules can weaken the structure. It can also invite IRS scrutiny during an audit.
FLPs support long-term family governance
An FLP can become more than a tax strategy. It can serve as a governance tool. Children learn how assets are managed. They gain financial education while holding limited interests. Parents model decision-making. The partnership becomes a platform for teaching stewardship. Over time, it can support a smooth generational transition.
The role of trusts in FLP planning
Many families pair FLPs with irrevocable trusts. A trust can hold limited partner interests on behalf of children. This protects assets from creditors, divorce claims, or immature decision-making. It also creates flexibility for future distributions. The trust receives income in proportion to its ownership. Trustees then decide how and when to distribute funds.
Why professional support matters
An FLP is a complex structure. It involves tax rules, legal requirements, and valuation principles. Advisors play an important role. Lawyers draft the partnership agreement. Appraisers set the value of interests. Tax professionals handle filings and reporting. Mistakes are costly. Precision keeps the structure effective.
Who benefits most from an FLP?
FLPs are most effective for families with substantial assets. The structure offers strong control features and powerful tax leverage. Families with real estate portfolios or large investment accounts often benefit the most. Parents who value control also find comfort in the design. The partnership gives them full authority while still shifting wealth to the next generation.
