Key Takeaways
- Family-only partnership with general and limited partners.
- GPs retain control; LPs have limited liability.
- Used for estate planning and tax-efficient wealth transfer.
- Requires legal complexity and IRS compliance.
What is Family Limited Partnership (FLP)?
A Family Limited Partnership (FLP) is a legal entity where family members or their trusts pool assets under a partnership structure, typically with parents as general partners controlling management and children as limited partners holding passive interests. This setup helps consolidate investments and facilitates immediate family wealth management and transfer.
FLPs are commonly used to manage real estate, business interests, and securities while providing estate planning and asset protection benefits.
Key Characteristics
FLPs combine family control with limited liability and tax advantages. Key features include:
- Control Retention: General partners maintain decision-making power despite gifting limited partner interests.
- Limited Liability: Limited partners enjoy protection from partnership debts and creditors.
- Valuation Discounts: Interests often qualify for fair market value discounts due to lack of control and marketability.
- Estate Planning Tool: Enables gradual wealth transfer with potential tax savings.
- Restricted Transfers: Partnership agreements typically limit interest sales outside the family.
- Complex Compliance: Requires legal setup, annual filings, and valuation appraisals.
How It Works
Parents or senior family members form the FLP and contribute assets like real estate or investments, often retaining a small general partner interest (e.g., 1-10%) to control management. Limited partners, usually children or grandchildren, receive passive ownership without management rights.
Over time, parents can gift limited partnership interests to heirs, leveraging valuation discounts to reduce taxable estate value. This structure helps protect assets from creditors and provides a centralized mechanism for managing diverse family holdings. FLPs may also integrate with other strategies such as the backdoor Roth IRA for comprehensive financial planning.
Examples and Use Cases
FLPs are especially useful for families with significant assets seeking control and tax efficiency. Examples include:
- Real Estate Management: Parents transfer rental properties into an FLP and gift interests to children while managing operations themselves.
- Business Succession: Family businesses like Delta use structures akin to FLPs to facilitate generational transitions.
- Investment Consolidation: Families hold diversified portfolios including stocks listed on guides like best dividend stocks for beginners within an FLP to streamline management.
Important Considerations
While FLPs offer benefits, they involve complexity and costs such as legal fees and annual compliance. The IRS scrutinizes FLPs for legitimate business purpose to prevent abuse of valuation discounts. Ensuring economic substance and proper documentation is critical.
Additionally, general partners face potential personal liability unless their interest is held via an entity like an LLC. Family dynamics may complicate management, so professional advice is essential to navigate estate and tax implications effectively.
Final Words
Family Limited Partnerships offer a strategic way to retain control while transferring wealth and reducing estate taxes. Consult a specialized attorney or financial advisor to tailor an FLP structure that fits your family’s assets and long-term goals.
Frequently Asked Questions
A Family Limited Partnership (FLP) is a legal entity formed under state law where family members or their trusts are the only partners. General partners, often parents or senior family members, manage the assets and hold a small controlling interest, while limited partners, such as children or grandchildren, have non-controlling ownership.
FLPs facilitate estate planning by allowing parents to transfer assets to children through discounted limited partnership interests. This strategy helps reduce gift and estate taxes while enabling parents to retain control over the assets as general partners.
The key benefits of an FLP include maintaining control over family assets, achieving tax advantages through valuation discounts, protecting assets from creditors, and providing a flexible structure for business succession and centralized family investment management.
General partners (GPs), typically parents or senior family members, manage the day-to-day operations, distributions, and decision-making in an FLP. Limited partners (LPs), often children or grandchildren, have passive ownership without management rights.
Yes, FLPs involve complexity and costs such as legal fees, valuation appraisals, and ongoing compliance. Additionally, the IRS may scrutinize FLPs to ensure they have a legitimate business purpose and are not solely for tax avoidance.
Typically, FLP agreements include restrictions that prohibit selling or transferring partnership interests outside the family. This helps keep assets within the family and supports long-term succession planning.
Limited partners in an FLP have limited liability, shielding their interests from partnership debts and creditors. Charging order protections also limit creditor access, helping to preserve family wealth.
FLPs can be costly and complex to establish and maintain, making them generally more suitable for larger estates. Small estates may find the formation and ongoing compliance expenses outweigh the benefits.
