Family Limited Partnership

Family Limited Partnership is a limited partnership between family members. The structure inherent to limited partnerships, i.e., general partners with managerial control and limited partners without control or liability, makes them attractive to parents who want to transfer some ownership interest to young, minor, or inexperienced children, without the worry of the children’s interference in the business. Because an FLP can own an interest in any other entity (except an S corporation), family assets can often be placed in an FLP.

Creativity with the design of the FLP provisions and valuation of the interest (including a discount for lack of marketability or control may allow the transfer of a sizeable percentage of the equity in the FLP while minimizing payment of gift or estate tax. The existence of the charging order as the sole means of collection by a creditor against the FLP adds to the attraction. If an FLP is under consideration care should be given to identifying a sound business purpose for the FLP and the assets contributed and the FLP itself have economic substance.

Profits of the partnership must be allocated, or divided, in proportion to each partner’s capital investment. In order to avoid inclusion under IRC Section 2036 (i.e., prohibition against retained life estates) of the underlying partnership assets (rather than the partnership itself) partnership formalities should (1) maintain adequate assets outside of the FLP to support themselves separate from the partnership assets; (2) not retain complete control over the income of the partnership; and (3) not use the partnership assets to pay personal expenses.


  • Retention of limited control by the general partner, who has property which he/she is willing to transfer to family members but is reluctant to lose total control over the property. A general partner operating under a well drafted partnership agreement may maintain indirect control without adverse income and estate tax consequences.
  • Shifting of income within certain family partnership limits. The general partner often has the power to retain current profits for investment and reasonable business needs.
  • Protection of partnership assets from the creditors of limited partners by restricting the limited partner’s ability to dispose of their limited partnership interests. Because the general partner has the ability to retain profits, the flow through nature of partnership income taxation gives him/her the ability to create a tax liability without making cash distributions for tax payments (i.e., an “ugly” asset).
  • Reduction of value through minority discounts and lack of marketability. The typical limited partnership gift represents a minority interest. Lack of marketability can be established by prohibitions against terminating the partnership without the concurrence of all partners (this prohibition is usually limited to 40 years or less) or valuation discounts in the range of 30 to 49 percent.
  • Facilitating gifts of assets which otherwise are not easily divisible (e.g., the family farm). Often the ultimate goal is for the parent to eventually own only modest partnership interests, with the bulk of the FLP being held by other family members.


  • The traditional partnership freeze is subject to the impact of the valuation rules. Therefore it is best to use an properly qualified appraiser perform the valuation.
  • There are additional expenses associated with establishing and accounting for an FLP (e.g., an information tax return must be filed).
  • Gifts do not receive a step-up in income tax basis.
  • Retained partnership interests continue to appreciate in the parent’s estate until they are transferred during lifetime or at death.

For information on how to get started on your estate plan visit our Estate Planning Process page.