8940 / What is a family limited partnership?

A family limited partnership (FLP) is a partnership consisting of family members that, when properly formed and maintained, can be used to achieve both the lifetime and estate planning goals of an individual seeking to transfer wealth. When contemplating transferring wealth, a person’s lifetime goals often include retaining control of assets before death and protecting assets from creditors, while estate planning goals are often centered upon minimizing taxes and providing financial security to future generations.

The structure of a FLP provides an opportunity to accomplish both categories of goals and is identical to other limited partnerships in that it must consist of at least one general and one or more limited partners. The general partner in a FLP manages the partnership and makes all business decisions, thus retaining control of the assets, but is exposed to unlimited personal liability for the debts of the FLP. Conversely, the limited partner is afforded limited liability but cannot participate in management of the partnership.

The general partner is usually the asset owner who wishes to transfer his/her assets to future generations in a tax-advantaged manner. Conceptually, transferring assets using a FLP involves two steps: (1) the general partner contributes assets to a newly formed FLP in exchange for a fractional general partnership interest (usually 1-2 percent) and a substantial limited partnership interest (usually 98-99 percent) and (2) gifting the limited partnership interest(s) to the desired family members.

The gifting of limited partnership interests (as opposed to interest in an asset) is the foundation for potentially realizing tax savings because limited partners’ interests can be subject to certain discounts for transfer tax purposes. Special valuation rules relating to transfers of a partnership interest between family members will generally not apply if the general partner and limited partner interests are properly structured in partnership agreement and the agreement is followed by the partners.¹