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What Are Family Limited Partnerships (FLPs)?

Writer's picture: McNickle & BonnerMcNickle & Bonner

Family Limited Partnerships, commonly known as FLPs, are specialized legal entities designed to help families manage and protect their assets. By combining the flexibility of a limited partnership with the strategic benefits of estate planning, FLPs offer a range of advantages for families who want to preserve their wealth for future generations. Let’s explore the structure, benefits, and potential uses of FLPs.



The Structure of a Family Limited Partnership

An FLP consists of two types of partners: general partners (GPs) and limited partners (LPs):

  1. General Partners (GPs):

    • These partners have full control over the partnership’s operations and decision-making.

    • GPs are typically family members who actively manage the FLP’s assets.

    • They bear unlimited liability for the partnership’s debts and obligations.

  2. Limited Partners (LPs):

    • These partners have no role in daily management but hold an ownership interest in the partnership.

    • LPs are usually other family members, such as children or grandchildren.

    • Their liability is limited to their investment in the FLP.

Assets such as real estate, businesses, investments, and other valuable holdings can be transferred into the FLP, giving the family a centralized structure for managing wealth.


Benefits of a Family Limited Partnership

FLPs offer several advantages, particularly for families focused on asset protection and estate planning:

  1. Estate Tax Reduction:

    • By transferring assets to an FLP, families can reduce the taxable value of their estate.

    • Gifting limited partnership interests to heirs can lower gift and estate tax obligations due to valuation discounts for lack of control and marketability.

  2. Asset Protection:

    • Assets within an FLP are protected from creditors of individual family members.

    • Creditors cannot force the sale of FLP assets to satisfy personal debts.

  3. Centralized Management:

    • The general partners maintain control over asset management, ensuring alignment with the family’s goals.

    • This setup prevents younger or less experienced family members from mismanaging inherited assets.

  4. Family Wealth Preservation:

    • FLPs encourage long-term wealth preservation by consolidating family assets under one legal structure.

    • They help instill financial discipline and promote intergenerational planning.

  5. Flexibility:

    • The FLP structure can accommodate a wide variety of assets and adapt to changing family needs over time.


How Are Family Limited Partnerships Used?

FLPs are versatile tools that can serve multiple purposes, including:

  • Estate Planning: Gifting limited partnership interests to heirs allows wealth to transfer while minimizing tax burdens.

  • Business Succession: Family businesses can be transitioned to the next generation without relinquishing operational control.

  • Real Estate Holdings: Consolidating real estate under an FLP simplifies management and provides liability protection.

  • Investment Management: Families can pool resources to invest in stocks, bonds, or private ventures under a unified strategy.


Potential Drawbacks and Considerations

While FLPs provide many benefits, they also come with some potential challenges:

  1. Complexity and Costs:

    • Setting up and maintaining an FLP requires legal and financial expertise.

    • Ongoing administrative costs may be significant.

  2. IRS Scrutiny:

    • FLPs are often scrutinized by the IRS, especially regarding valuation discounts for tax purposes.

    • Proper documentation and professional advice are essential to ensure compliance.

  3. Family Dynamics:

    • Disputes among family members can arise, particularly if there is disagreement over asset management or distributions.


Is an FLP Right for Your Family?

Family Limited Partnerships are powerful tools for families looking to protect and manage their wealth. However, they are not a one-size-fits-all solution. Consulting with our team of professionals is crucial to determine whether an FLP aligns with your family’s goals and circumstances.


By carefully planning and structuring an FLP, families can achieve their objectives of preserving wealth, minimizing taxes, and fostering financial harmony across generations.

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