In estate planning, one unique tool is a family limited partnership (FLP). An FLP allows you to manage and protect your wealth while gradually transferring it to your children or other heirs. It can also have other benefits such as potential tax savings and protection from creditors. You also don’t need to own a business to have an FLP.
FLPs In A Nutshell
To take advantage of an FLP, you form a limited partnership to transfer a family business, real estate, investments, or other assets. Initially, you receive a general partnership interest of 1% or 2% and limited partnership interests totaling 99% or 98%. You then sell or gift the limited partnership interests to your children or other family members.
As a general partner, you retain management control over the partnership assets, even after you’ve transferred most of the assets’ value to other family members. The significant benefit here is that an FLP removes wealth from your estate while the federal gift and estate tax exemption is at a record high without you immediately parting with control over that wealth. For 2026, the exemption amount is $15 million ($30 million on a combined basis for married couples). (Although there’s no longer an expiration date for the high exemption, lawmakers could still reduce the amount in the future).
Limited partners, on the other hand, have minimal control over the partnership, and their ability to sell their interests to nonfamily members is generally highly restricted by terms of the partnership agreement. This allows the older generation to consolidate management of family assets and keep them in the family.
Reduce Your Taxable Estate
Transferring FLP interests to family members removes the value of the underlying assets from your taxable estate. Although interests that are gifted rather than sold (or sold for less than fair market value) are taxable gifts, they can be shielded (in whole or in part) from federal gift tax by your gift and estate tax exemption.
In addition, because limited partnership interests possess little control over the partnership and are challenging to sell, their value for gift tax purposes is generally discounted substantially. This allows the older generation to give away even more wealth tax-free.
Shift Income To A Lower Tax Bracket
A properly structured and operated FLP allows you to shift income to your children or other family members who may be in lower tax brackets. An FLP is a pass-through entity for income tax purposes. In other words, there’s no entity-level federal tax. Instead, the FLP’s income (as well as its deductions, credits, and other items) is passed through to the individual partner, who reports their share on a personal income tax return.
So, for example, if you’re in the 35% tax bracket and transfer FLP interests to family members in the 10% or 12% bracket, the tax savings can be substantial. However, your ability to shift income to children may be limited because of the “kiddie” tax, which can apply to children as old as 23, depending on the circumstances.
Increase Asset Protection
Transferring assets to an FLP can place them beyond the reach of certain creditors. Generally, an FLP’s assets are protected against claims by the limited partners’ personal creditors. In most cases, those creditors are limited to obtaining rights to distributions, if any, received by a limited partner. In addition, limited partners’ personal assets held outside the FLP are generally shielded against claims by the FLP’s creditors.
General partners don’t enjoy the same protections. Still, they may be able to limit their personal liability by forming a corporation or limited liability company to hold their general partnership interests.
Seek Professional Guidance
A potential downside to consider is that establishing and maintaining an FLP requires legal and tax expertise, ongoing administrative oversight, and strict adherence to partnership formalities to withstand IRS scrutiny. Contact us for help determining whether an FLP would be beneficial for your family.
