How to Use a Family Limited Partnership in Estate Planning

For high-net-worth families, preserving wealth across generations while minimizing tax burdens is a year-round challenge. A family limited partnership (FLP) offers a sophisticated strategy that may help achieve these objectives while maintaining family control over assets and providing protection from creditors. FLPs, which are powerful but often underutilized, may warrant  consideration in a comprehensive estate plan for families with substantial assets.

Implementing a family limited partnership in estate planning typically involves several key considerations:

• Establish the partnership structure with family members as both general and limited partners, with parents typically serving as general partners who maintain control.
• Transfer valuable assets such as real estate, business interests, or investment portfolios into the partnership.
• Gift limited partnership interests to children or other heirs at potentially discounted valuations for gift tax purposes.
• Create and document legitimate business purposes for the partnership beyond tax savings to comply with IRS rules.
• Implement appropriate governance rules through a carefully drafted partnership agreement that aligns with your family’s values and succession plans.

At Avidian Wealth Solutions, our team can help you evaluate  whether  an FLP is an appropriate component for your wealth transfer goals, and design a solution that aligns with your family’s values and vision. Schedule a conversation with us today to learn more about our comprehensive estate planning solutions.

Establish the partnership structure

Creating a family limited partnership requires careful consideration of how ownership and control will be distributed. Typically, senior family members serve as general partners holding a small percentage (often 1–2%) of partnership interests while maintaining management control, while younger generations receive limited partnership interests that confer economic rights without decision-making authority. The synergy between a family limited partnership and estate planning becomes evident in this structure, as it allows wealth to transfer while preserving parental oversight.

When determining the optimal structure, consider whether a family limited partnership vs trust arrangement better serves your needs. While trusts offer certain advantages in terms of privacy and specific control mechanisms, the partnership model provides flexibility for ongoing business operations and potentially greater discounting opportunities. Many high-net-worth families implement both strategies as complementary tools, using the partnership for operating assets and trusts for passive holdings.

Transfer valuable assets

Once established, the next step involves identifying and transferring appropriate assets into the partnership. Ideal candidates include: 

• Appreciating assets
• Income-producing properties
• Family business interests that benefit from centralized management

The process requires proper valuation, thorough documentation, and careful timing to maximize tax benefits. How does a family limited partnership work? By consolidating assets that might otherwise be fragmented across multiple ownership structures.

Transferring assets requires meticulous attention to legal formalities and tax implications. Partners must contribute assets with legitimate business value, maintain proper capital accounts, and observe all partnership formalities. If structured and maintained in accordance with applicable law, real estate holdings, securities portfolios, and closely-held business interests typically perform well within the FLP asset protection framework, benefiting from both the liability shield and the potential valuation discounts for gift and estate tax purposes.

Gift limited partnership interests

Strategic gifting of limited partnership interests is a cornerstone of effective FLP implementation. By transferring these interests to children or grandchildren over time, senior family members can reduce their taxable estates while introducing the next generation to wealth management. What is estate planning if not the systematic process of transferring assets in a tax-efficient manner while preparing heirs for responsible stewardship? The limited partnership structure facilitates this educational component naturally.

When gifting partnership interests, discounts for lack of marketability and lack of control may be applied, potentially reducing the taxable value of transfers when compared to the underlying assets’ fair market value. However, these discounts face increasing IRS scrutiny, requiring substantial documentation and legitimate business reasons beyond tax savings. Gifts should follow a strategic schedule aligned with lifetime exemption limits and the family’s broader succession timeline.

Create and document legitimate business purposes

A successful FLP must serve authentic business purposes beyond tax advantages. Courts have consistently invalidated partnerships created solely for tax benefits, making it essential to establish and document legitimate objectives such as asset protection, centralized management, or business continuity. 

Essential estate planning documents should clearly articulate these purposes and demonstrate how the partnership structure advances them. Consider the following guidelines to help you stay on track:

1. Hold regular partnership meetings with detailed minutes, and maintain consistent adherence to partnership formalities to reinforce the legitimate business purpose.
2. Keep updated records of business decisions, investment strategies, and management activities to demonstrate active engagement. 
3. Operate the partnership as a genuine business entity with regular distributions, proper accounting, and proportionate allocation of profits and losses according to partnership interests.

Implement appropriate FLP governance rules

Effective governance represents the foundation of sustainable FLPs. A comprehensive partnership agreement should detail voting rights, distribution policies, dispute resolution mechanisms, and exit strategies. Estate planning for high-net-worth families often requires balancing competing interests (e.g., providing liquidity for current generations while preserving capital for future ones) and the governance structure must address these tensions explicitly.

The family limited partnership structure offers a valuable framework for implementing family values and preparing the next generation for wealth responsibility. Partnership meetings offer natural opportunities for financial education, sharing family history, and clarifying shared purposes.

Importantly, well-designed governance rules can prevent family conflicts by establishing clear expectations about distributions, decision-making authority, and succession planning while allowing the partnership to evolve as family circumstances change.

Family limited partnership — FAQs

What is the downside of a family limited partnership?

Family limited partnerships involve substantial setup and maintenance costs that may not justify benefits for smaller estates. The IRS increasingly scrutinizes these arrangements, challenging valuation discounts if partnerships fail to follow proper formalities. Administrative complexity and potential family conflicts around control and distributions represent additional challenges.

What are the tax implications of a family limited partnership?

FLPs offer potential discounts on gift and estate tax valuations due to the lack of marketability and control limitations. As pass-through entities, all profits and losses flow to partners’ individual returns regardless of actual distributions. Annual partnership tax filings and compliance with complex allocation rules create additional administrative responsibilities.

What happens to a family limited partnership when someone dies?

When a partner dies, their interest becomes part of their estate while the partnership typically continues operating without dissolution. Partnership agreements should include succession provisions such as buyout options or rights of first refusal. Proper planning leverages family limited partnership asset protection features during this transition while potentially receiving beneficial tax treatment.

Craft your family’s financial legacy through strategic partnership.

When properly structured and maintained, family limited partnerships provide significant advantages in asset protection, tax efficiency, and multigenerational wealth transfer while preserving family control over important assets. However, successfully implementing FLPs requires careful navigation of complex legal, tax, and family dynamics to achieve optimal results.

Avidian Wealth Solutions brings decades of experience guiding high-net-worth families through the nuances of advanced estate planning techniques. Our team of advisors provides comprehensive guidance throughout the entire process, from initial structure design to ongoing management and eventual succession planning.

With convenient office locations serving clients in Houston, Austin, Sugar Land, and The Woodlands, we deliver personalized, professional guidance that addresses your family’s unique circumstances and objectives. Schedule a conversation with our experienced advisors today to discuss how using a family limited partnership in estate planning might enhance your wealth preservation strategy.

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