How Family Limited Partnerships (FLPs) Work in Estate Planning (Expanded Definition)

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Family Limited Partnerships (FLPs) serve as an effective estate planning tool for families seeking to preserve wealth, minimize taxes, and protect assets. By collaborating with an experienced estate planning attorney near you, you can strategically set up an FLP to ensure a smooth transfer of assets to the next generation while maintaining control and reducing tax burdens.

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Discover how Family Limited Partnerships (FLPs) can enhance your estate planning strategy by preserving assets, reducing taxes, and protecting wealth. Learn the benefits and potential challenges of FLPs, and find an experienced attorney near you to help you secure your family's financial future.

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Advanced Estate Planning Strategies for High-Net-Worth Individuals (Thought Leadership)

How High-Net-Worth Individuals Can Minimize Estate Taxes (How To)

How Family Limited Partnerships (FLPs) Work in Estate Planning (Expanded Definition)

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How Family Limited Partnerships (FLPs) Work in Estate Planning

For families with significant wealth, real estate, or business interests, Family Limited Partnerships (FLPs) provide a powerful way to preserve assets, reduce estate taxes, and protect wealth from creditors. By structuring your estate through an FLP, you can transfer assets to heirs efficiently while maintaining control and minimizing tax burdens.

But how does an FLP work, and is it the right strategy for you? Let’s break it down.

💡 For every post in this series, scroll down to “Related Posts.”

What is a Family Limited Partnership (FLP)?

A Family Limited Partnership (FLP) is a legal entity that allows family members to own and manage assets together while providing significant estate tax savings, creditor protection, and business succession benefits.

An FLP is structured with two types of partners:

General Partners (GPs):

Have full control over the partnership and its assets.

Typically, parents or senior family members act as GPs.

Can be structured as an LLC for additional protection.

Limited Partners (LPs):

Have ownership interest but no management control.

Typically, children or other heirs hold LP interests.

LP shares can be gifted over time to reduce estate tax exposure.

Key takeaway: An FLP lets parents retain control while gradually transferring wealth to the next generation at a reduced tax rate.

How an FLP Works in Estate Planning

An FLP acts as a holding company for assets such as:

Family businesses

Real estate investments

Stocks, bonds, and investment portfolios

Cash reserves

The general partners make all decisions, while limited partners hold passive ownership. Over time, the general partners can gift or sell LP shares to heirs, transferring wealth without triggering excessive estate taxes.

Example: A couple places a $10 million real estate portfolio into an FLP. They gift LP interests to their children over several years, reducing their taxable estate while keeping control over property management.

Benefits of Using an FLP in Estate Planning

1. Reduces Estate and Gift Taxes

The IRS allows valuation discounts for FLP shares, meaning transferred assets are taxed at a lower value than their actual market worth.

Parents can gift FLP shares annually under the gift tax exemption ($18,000 per person in 2024).

Over time, a large estate can be transferred with minimal tax consequences.

Example: A business owner places a $5 million company into an FLP. By gifting LP shares with a 30 percent discount, the taxable value is reduced to $3.5 million, minimizing estate tax liability.

2. Maintains Control Over Assets

General partners retain full management authority, even if they own a small percentage of the FLP.

Limited partners cannot sell assets, vote on business decisions, or demand distributions.

Why this matters: Parents can transfer wealth to children while ensuring they don’t mismanage assets.

3. Protects Assets from Creditors and Lawsuits

FLP assets are shielded from lawsuits and creditors of individual family members.

Limited partners’ interests cannot be seized by creditors without general partner approval.

Example: If a child (LP) goes through a divorce or bankruptcy, their FLP shares remain protected from creditors or ex-spouses.

4. Simplifies Business Succession Planning

FLPs provide a clear structure for transferring a family business without disruption.

Parents can train the next generation while gradually passing down ownership.

Avoids family disputes over inheritance, since business interests are clearly assigned.

Example: A father runs a successful manufacturing business and places it in an FLP. Over 20 years, he gifts LP shares to his children while maintaining full decision-making control as the GP.

Potential Risks and Challenges of FLPs

1. IRS Scrutiny and Valuation Challenges

The IRS closely monitors FLPs to prevent abuse of valuation discounts. If an FLP is improperly structured or the GP has too much control, the IRS may disqualify the tax benefits.

How to avoid issues:

Ensure the FLP is a legitimate business entity (not just a tax shelter).

Hire a qualified appraiser to determine appropriate valuation discounts.

Follow corporate formalities—hold meetings, keep records, and maintain separate accounts.

2. Limited Access to Funds for Heirs

Limited partners cannot withdraw funds at will—they must rely on GP-approved distributions. This can create liquidity issues for heirs who need cash but cannot sell FLP shares.

Solution:

Plan ahead for liquidity needs before transferring significant assets.

Include distribution provisions for emergencies.

3. Complexity and Legal Costs

FLPs require proper legal setup, annual filings, and ongoing management. Startup costs can range from $5,000–$20,000, depending on asset complexity.

Solution:

Work with an experienced estate planning attorney to structure the FLP correctly.

Maintain detailed financial records to prove compliance.

How to Set Up a Family Limited Partnership (FLP)

Step 1: Select a General Partner and Limited Partners

General Partner(s): Typically parents or business founders who manage the FLP.

Limited Partners: Children, heirs, or other family members who receive ownership interests.

Tip: The GP should own at least 1 percent of the partnership to retain control.

Step 2: Transfer Assets to the FLP

Identify assets to place in the partnership (real estate, business interests, investments).

Retitle assets under the FLP’s name.

Tip: Avoid transferring personal-use property (e.g., your primary home) into an FLP—it may trigger IRS challenges.

Step 3: Draft the FLP Agreement

Define management rules, distribution policies, and ownership rights.

Specify buy-sell provisions to control ownership transfers.

Tip: Work with a business attorney and tax expert to ensure the agreement meets IRS standards.

Step 4: Implement a Gifting Strategy

Use the annual gift tax exclusion ($18,000 per recipient in 2024) to gradually transfer LP shares to heirs.

Apply valuation discounts (typically 20 to 40 percent) to reduce taxable value.

Tip: Keep a paper trail of gifts and IRS filings to defend against audits.

Step 5: Maintain Proper FLP Administration

Hold annual meetings and document business decisions.

File tax returns and financial statements.

Keep separate business and personal finances.

Tip: Treat the FLP as a real business, not just an estate planning tool, to maintain tax benefits.

Final Thoughts: Is an FLP Right for You?

Best for:

Families with businesses, real estate, or investment portfolios.

High-net-worth individuals looking to reduce estate taxes.

Parents who want to maintain control while passing wealth to heirs.

Ready to protect your wealth with an FLP? Find a trusted estate planning attorney through ReferU.AI and start securing your legacy today.

How Family Limited Partnerships (FLPs) Work in Estate Planning (Expanded Definition)

How Family Limited Partnerships (FLPs) Work in Estate Planning