By Harry Prabandham · Updated September 28, 2026
Estate & Legacy
Family Limited Partnerships: Valuation Discounts and IRS Risk
A family limited partnership lets parents gift interests at appraised values reflecting lack of control and marketability, subject to IRS scrutiny.
Family Limited Partnerships: Valuation Discounts and IRS Risk
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What is a family limited partnership?
- It is a partnership, or often an LLC taxed as one, that holds family assets such as real estate, a business, or investments.
- Parents usually control management as general partner or manager, while children or trusts hold limited interests without management rights.
- Parents then gift or sell limited interests over time, using annual exclusions and lifetime exemption.
- In 2026 the annual gift exclusion is $19,000 per recipient and the basic exclusion is $15 million per person.
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Full Guide
What is a family limited partnership?
- It is a partnership, or often an LLC taxed as one, that holds family assets such as real estate, a business, or investments.
- Parents usually control management as general partner or manager, while children or trusts hold limited interests without management rights.
- Parents then gift or sell limited interests over time, using annual exclusions and lifetime exemption.
- In 2026 the annual gift exclusion is $19,000 per recipient and the basic exclusion is $15 million per person.
How do valuation discounts work?
- A limited interest can be worth less than its share of the underlying assets because the holder can't control decisions or easily sell.
- Appraisers apply discounts for lack of control and lack of marketability; the size depends on the facts and must be supported.
- A qualified independent appraisal is the basis for any discount claimed on a gift tax return.
Why does the IRS challenge FLPs?
- Under Section 2036, assets can be pulled back into the estate if the parent kept the benefit or control of the property transferred.
- Warning signs include paying personal expenses from the partnership, disproportionate distributions, funding with nearly all of the parent's assets, and forming it near death.
- Courts look for a legitimate non-tax reason for the partnership and consistent respect for formalities.
- Sections 2703 and 2704 also limit the effect of certain restrictions on valuation.
Does an FLP limit creditor access?
- State law generally limits a partner's personal creditor to a charging order, meaning a right to distributions if made.
- That can make partnership assets harder for a partner's creditors to reach, but results depend on the state.
- Transfers made after a claim arises can be undone under voidable-transfer laws.
What are the costs and trade-offs?
- Formation, appraisals, annual partnership returns, and K-1s add cost every year.
- Gifted interests carry over the donor's basis, so the family gives up the step-up in basis those assets might get at death.
- Parents give up economic ownership of what they transfer, and family governance becomes a formal legal relationship.
Key takeaways
- FLPs can transfer family assets at appraised values below a pro-rata share of the underlying assets.
- Discounts must be supported by appraisal and survive Section 2036 scrutiny.
- The trade-offs include ongoing cost, lost step-up in basis, and reduced personal control over transferred interests.
- Rubric coordinates FLP planning with your estate attorney and CPA; confirm the structure with them.
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