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Estate & Legacy
Family Limited Partnerships: Transferring Wealth at a Discount
Family Limited Partnerships let you transfer assets to the next generation at a discounted value, reducing gift and estate taxes while maintaining control.
Family Limited Partnerships: Transferring Wealth at a Discount
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How a Family Limited Partnership Works
- Parents create a partnership and contribute assets, typically real estate, investments, or business interests
- Parents serve as general partners with full management control, usually holding a 1–2% general partner interest
- Children or trusts receive limited partner interests, which carry economic rights but no management authority
- Over time, parents gift or sell limited partner interests to the next generation at discounted values
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How a Family Limited Partnership Works
- Parents create a partnership and contribute assets, typically real estate, investments, or business interests
- Parents serve as general partners with full management control, usually holding a 1–2% general partner interest
- Children or trusts receive limited partner interests, which carry economic rights but no management authority
- Over time, parents gift or sell limited partner interests to the next generation at discounted values
Valuation Discounts That Reduce Taxes
- LP interests are worth less than underlying assets since holders cannot force a sale or control decisions
- Lack of marketability discounts reflect that partnership interests cannot be easily sold on the open market
- Minority interest discounts apply because limited partners have no voting or management power
- Combined discounts typically range from 20-40%, so $1M in assets might transfer at $600K-$800K for tax
Gift and Estate Tax Savings
- Discounted values mean you can transfer more wealth within your annual gift tax exclusion and lifetime exemption
- A 35% discount on a $10 million partnership lets you transfer $3.5 million in value without using any exemption
- Assets inside the partnership grow outside your estate once the limited partner interests have been gifted
- This strategy is especially valuable while the lifetime exemption remains at historically high levels
Asset Protection Benefits
- Creditors of a limited partner generally cannot seize partnership assets, they can only obtain a charging order
- A charging order entitles the creditor to distributions if and when they are made, but does not force liquidation
- This makes FLP assets harder for creditors to reach compared to assets held individually
- Asset protection works best when the FLP is established well before any creditor claims arise
IRS Scrutiny and Compliance Requirements
- The IRS scrutinizes FLPs created shortly before death or funded mainly with marketable securities
- You must respect partnership formalities, hold meetings, maintain records, and make proportionate distributions
- Commingling personal and partnership assets or ignoring formalities can cause the IRS to disallow discounts
- Independent appraisals from qualified valuation professionals are essential to support your claimed discounts
FLP vs LLC: Choosing the Right Structure
- Family LLCs offer similar benefits with more flexible management structures and simpler state filing requirements
- FLPs require a general partner with unlimited liability; LLC members have limited liability by default
- Many families now use an LLC taxed as a partnership to get the same valuation discounts with better liability protection
- Choice between FLP and LLC depends on state law, asset type, and your attorney's recommendation
When an FLP Makes Sense
- Your estate exceeds or is approaching the lifetime exemption threshold and you want to reduce future estate taxes
- You hold illiquid assets like real estate or business interests that naturally support larger valuation discounts
- You want to transfer wealth to the next generation while retaining day-to-day control over the assets
- You are willing to maintain ongoing requirements, annual filings, meetings, and proper records
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