Family Limited Partnerships: A Powerful Tool for Estate Planning

Family Limited Partnerships (FLPs) are popular estate planning vehicles that offer unique benefits for families looking to preserve wealth, minimize estate taxes, and maintain control over assets. In this post, we’ll explore how FLPs work, common use cases, and the key benefits they provide in estate planning.

What is a Family Limited Partnership?

A Family Limited Partnership (FLP) is a legal entity that allows family members to pool assets, such as real estate, investments, or business interests, under one entity while maintaining control and securing tax advantages. It consists of two types of partners:

1. General Partners (GPs): Typically, parents or senior family members who maintain control over the partnership's day-to-day operations and investment decisions.
2. Limited Partners (LPs): Usually children or other family members who hold a financial interest but have no management control.

The structure allows GPs to transfer wealth to LPs while still maintaining control over the assets.

How Does a Family Limited Partnership Work?

1. Formation: An FLP is created by drafting a partnership agreement that outlines the roles, responsibilities, and ownership percentages of the partners. It’s registered as a business entity in the state of formation.
2. Contribution of Assets: General partners contribute assets (e.g., real estate, securities, or business interests) into the partnership. These assets are then owned by the FLP, not the individual partners.
3. Gifting of Partnership Interests: General partners gift limited partnership interests to family members, utilizing the annual gift tax exclusion or lifetime estate tax exemption.
4. Valuation Discounts: FLP interests are often subject to valuation discounts for lack of marketability and lack of control, reducing the taxable value of the gifted interests.
5. Management and Control: General partners maintain control over investment decisions distributions, even as ownership is transferred to limited partners.

Estate Tax Exclusion and Upcoming Changes

One of the most compelling reasons to consider a FLP is the opportunity to leverage the current federal estate tax exclusion. In 2025, the estate tax exclusion is set to decrease from the historically high level of approximately $13.99 million per individual ($27.98 million for married couples) due to the sunset provision of the Tax Cuts and Jobs Act of 2017. Unless new legislation is passed, the exclusion will revert to approximately half of its current amount.

This impending change makes 2025 a pivotal year for estate planning, as families can take advantage of the higher exclusion to transfer more wealth tax-efficiently. FLPs are particularly effective in this scenario because they allow for strategic gifting of partnership interests often at discounted values.

Use Cases for Family Limited Partnerships

1. Estate Tax Reduction
   FLPs enable the gradual transfer of wealth to the next generation while leveraging valuation discounts. By gifting discounted partnership interests, families can reduce the value of their taxable estate, minimizing estate taxes.
2. Asset Protection
   Since FLP assets are owned by the partnership rather than individuals, they are generally protected from creditors' claims against individual partners.
3. Business Succession Planning
   FLPs allow senior family members to transfer business interests to the next generation while maintaining control over business operations. This ensures continuity and orderly succession.
4. Income Shifting and Tax Efficiency
   Income generated by partnership assets can be distributed among family members in lower tax brackets, reducing the overall tax burden on the family.
5. Centralized Management and Control
   FLPs centralize management under the general partners, allowing them to maintain control over investment and distribution decisions, even as ownership is distributed among family members.

Potential Risks and Considerations

• IRS Scrutiny: The IRS closely examines FLPs, particularly for excessive valuation discounts. Attaining valuations performed by a professional, proper documentation and a legitimate business purpose are essential.
• Complexity and Costs: Establishing and maintaining an FLP involves legal, accounting, and administrative costs.

Is a Family Limited Partnership Right for You?

FLPs are powerful tools for families with significant wealth, real estate, or closely-held businesses looking to minimize estate taxes, protect assets, and ensure orderly succession. However, they require careful planning, legal expertise, and ongoing administration. If you’re interested in learning more about how a Family Limited Partnership could benefit your family’s estate planning strategy, reach out to us today to schedule a consultation.

Sources: IRS releases tax inflation adjustments for tax year 2025 | Internal Revenue Service

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