Understanding Family Limited Partnerships (FLPs): A Comprehensive Guide

A Family Limited Partnership (FLP) is a specialized legal entity used by families to consolidate, manage, and transfer significant assets such as real estate, investments, or family-owned businesses. Establishing an FLP allows family members to hold partnership interests instead of direct ownership in assets, which can result in tax benefits, asset protection, and streamlined succession planning.

How Does an FLP Operate?

An FLP typically involves two types of partners:

  • General Partners: Usually senior family members (such as parents or grandparents) who manage the partnership’s assets. They hold decision-making authority, including buying, selling, and managing investments. General partners typically hold a small percentage of ownership (often 1-2%) but retain control.
  • Limited Partners: Usually younger family members or beneficiaries who hold most of the ownership interests but have restricted involvement in management. Their liability is limited to their investment.

Assets like family homes, investment portfolios, or business interests are contributed to the FLP by the general partners. In exchange, they receive partnership interests representing ownership shares in the FLP. Over time, general partners can gift limited partnership interests to heirs incrementally, often making use of the annual gift tax exclusion (currently $17,000 per recipient in 2025) to transfer wealth while minimizing gift tax exposure.

Key Benefits of an FLP

  • Estate Tax Reduction: Limited partnership interests may be valued at a discount due to restrictions on marketability and control, lowering the taxable estate value. This method helps families transfer larger wealth portions without exceeding gift tax limits.

  • Asset Protection: Assets placed inside an FLP are typically protected from creditors of limited partners. Creditors can usually obtain only a charging order, allowing collection of distributions to the partner but not seizure of partnership assets or control rights.

  • Maintained Control: General partners retain authority over management decisions, allowing for centralized investment strategies and preserving family control even as ownership stakes transfer.

  • Simplified Asset Management: Combining multiple family assets under one FLP simplifies administration and potentially lowers management costs.

  • Wealth Education: FLPs offer a platform for educating younger family members about financial management and stewardship.

Considerations and Challenges

  • Complex Setup and Costs: Establishing an FLP requires professional assistance from attorneys and tax advisors. Legal documentation, valuation appraisals, and ongoing compliance increase expenses.

  • IRS Scrutiny: The IRS emphasizes that FLPs must have a valid business purpose beyond tax savings. Lack of legitimate activity or substantive management duties can result in disallowance of valuation discounts.

  • Illiquidity: Limited partnership interests are not easily sold or transferred, which can reduce flexibility for beneficiaries.

  • Gift Tax Rules: While giving interests can optimize estate planning, gifts beyond the annual exclusion require filing gift tax returns and count against lifetime exemptions.

  • Family Dynamics: Clear partnership agreements addressing decision-making and conflict resolution are critical to harmonize family relationships.

FLPs Compared to Trusts

Unlike trusts, which primarily focus on asset distribution and probate avoidance, FLPs emphasize management and control of family assets. General partners continue to manage the assets actively, whereas trustees follow set instructions. Both tools can be combined strategically for comprehensive estate planning.

Who Should Consider an FLP?

FLPs are best suited for families with substantial assets—often millions of dollars in real estate, business interests, or investments—who want to:

  • Reduce estate and gift tax burdens
  • Protect assets from external claims
  • Maintain active control over investments
  • Educate heirs on wealth stewardship

Essential Steps Before Creating an FLP

  1. Consult experienced estate planning attorneys and tax advisors.
  2. Ensure the FLP has a valid, non-tax-related business purpose.
  3. Obtain professional appraisals of contributed assets.
  4. Follow formal business practices: hold meetings, maintain records, and file IRS Form 1065 annually.
  5. Draft comprehensive partnership agreements clarifying roles and rights.

For deeper reading on estate tax planning, see our Estate Tax Planning guide. Also consider exploring Estate Planning fundamentals.

Frequently Asked Questions

Can any asset be contributed to an FLP?
Yes. Assets commonly include real estate, investment accounts, closely held business interests, and collectibles. Illiquid assets often benefit most from valuation discounts.

Can limited partners sell their interests?
Sales are usually restricted to keep assets within the family, often with rights of first refusal for remaining partners.

Does an FLP eliminate estate taxes completely?
No. While discounts reduce taxable value, estate taxes may still apply depending on total estate size after applying the 2025 federal estate tax exemption of $12.92 million per individual.

Authoritative Resources

An FLP can be a powerful tool for multigenerational wealth transfer, but it requires careful execution and professional guidance to realize its full benefits and comply with tax laws.