How Can a Family Limited Partnership (FLP) Be Used in Estate Planning?
A Family Limited Partnership (FLP) is a popular estate planning tool used to transfer wealth, maintain control, and reduce estate/gift taxes. Here’s how it works and why families use it:
What is an FLP?
A Family Limited Partnership is a legal entity where:
- General partners (GPs) manage the assets and control decisions (often parents).
- Limited partners (LPs) own a share but have no management control (often children or heirs).
How It’s Used in Estate Planning
1. Transferring Wealth While Keeping Control
You (as parents) can:
- Transfer assets (real estate, investments, business interests) into the FLP.
- Gradually gift limited partnership interests to children.
- Even after gifting, you retain control if you stay the general partner.
2. Reducing Estate Taxes
This is one of the biggest advantages.
Because LP interests:
- Lack control (minority interest)
- Aren’t easily sold (lack of marketability)
Their value can be discounted for tax purposes (often 15–40%, depending on structure). Learn more from IRS data on FLP valuation discounts.
This means:
- You can transfer more wealth
- While using less of your lifetime gift/estate tax exemption
See Investopedia’s overview of FLP estate and gift tax advantages.
3. Asset Protection
Assets inside the FLP may be better protected:
- Creditors of a limited partner typically can’t seize underlying assets
- They may only get a “charging order” (rights to distributions, not control)
Read more about FLP asset protection and charging orders at Justia.
4. Centralized Family Asset Management
Instead of splitting assets among heirs:
- Everything stays pooled in the FLP
- The GP manages investments, distributions, and strategy
This is especially useful for:
- Real estate portfolios
- Family businesses
5. Facilitating Succession Planning
You can:
- Gradually shift ownership to the next generation
- Teach heirs about financial management
- Maintain structure and oversight during the transition
Important Considerations
Must Have a Legitimate Purpose
The IRS scrutinizes FLPs. They must not be purely for tax avoidance—you need valid non-tax reasons (e.g., centralized management, asset protection). IRS analysis of FLP estate planning benefits and requirements.
Proper Setup and Maintenance
You must:
- Follow formalities (separate accounts, records)
- Avoid mixing personal and partnership assets
Costs
- Legal setup can be expensive
- Ongoing administration is required
Loss of Direct Ownership
Once assets are in the FLP:
- They belong to the partnership, not you individually
Simple Example
- Parents put $10M in investments into an FLP
- They keep 1% GP interest + 99% LP interest
- Over time, they gift LP shares to children
- Due to valuation discounts, taxable value might be reduced to ~$7M instead of $10M
Result: significant estate tax savings while still controlling assets.
When an FLP Makes Sense
FLPs are especially useful if you:
- Have a taxable estate
- Own illiquid or complex assets
- Want control + gradual wealth transfer
- Are planning multi-generational wealth preservation
Important disclaimer: This article is for informational purposes only and is not legal or tax advice. Consult a qualified estate planning attorney and tax professional before implementing any strategy.
