Estate Planning · Haute Lawyer Network
What Is a Family Limited Partnership?
Last reviewed: June 2026
A Family Limited Partnership (FLP) is a limited partnership structure used to transfer wealth within a family at reduced gift and estate tax values.
The senior generation (parents) contribute assets — investment portfolios, real estate, business interests — to the FLP and receive general partnership (GP) interests and limited partnership (LP) interests. They then gift or sell the LP interests to their children and grandchildren over time.
The key tax benefit: LP interests lack control and marketability — the LP holder cannot force distributions, cannot compel a sale, and cannot liquidate their interest. These restrictions justify applying valuation discounts — typically 15-35% — reducing the taxable value of the transferred interests and allowing more wealth to pass at lower gift or estate tax cost.
An FLP transferring $1 million in assets with a 30% discount costs only the gift tax on $700,000 — transferring $300,000 of value tax-free.
Frequently Asked Questions
What is the difference between an FLP and an LLC for estate planning?
Both can achieve similar valuation discount benefits. The choice depends on state law, the nature of the assets, and the family's operational preferences. FLPs are more common for investment assets; family LLCs are common for operating businesses.
What assets are best suited for an FLP?
Investment portfolios, real estate, and minority interests in closely held businesses — assets that lack a ready market and for which control limitations justify valuation discounts.
Can the IRS challenge FLP valuation discounts?
Yes — aggressively. The IRS challenges FLPs on several grounds: that the entity lacked economic substance, that the transfer was a deathbed transfer, that the parents retained too much control, or that the discounts were excessive. Proper structuring, independent management, and business purpose are essential.
What is the annual gift exclusion in the FLP context?
You can give LP interests worth up to $18,000 per recipient per year (2026) without using lifetime exemption. Combined with valuation discounts, this annual giving can transfer significant wealth tax-free over time.
Does an FLP provide asset protection?
Yes — properly structured FLPs provide creditor protection by making it difficult for a partner's personal creditors to reach partnership assets. Creditors of an LP holder are limited to a charging order — the right to receive distributions if and when made — rather than seizure of partnership assets.
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