Family Limited Partnerships

A family limited partnership, or FLP, holds a family’s real estate, business, or investments in one entity. Parents can retain management through the general partner while transferring limited partnership interests to children or trusts for later generations. Restrictions on those interests can support valuation discounts for gift and estate tax purposes.

An FLP needs a genuine purpose beyond tax savings, such as consolidated investment management or business succession. It must also be administered according to its agreement, with partnership and personal finances kept separate. We help families establish those purposes and maintain the records and procedures needed to support the plan.

Milvidskiy Law Group P.C. forms family limited partnerships, drafts the partnership agreements and the trusts that hold the limited interests, coordinates the appraisals, and administers the gifting programs that move interests to the next generation year after year.

How a Family Limited Partnership Works

The structure

The parents contribute assets to a limited partnership formed under state law. A general partner, typically a limited liability company the parents own, holds a small percentage interest and all of the management authority: what to buy and sell, when to distribute, whether to admit new partners. The parents initially hold the limited partnership interests as well, and then give or sell them, in whole or in part, to children, to trusts for children and grandchildren, or to both.

The discount

A limited partnership interest cannot be sold to outsiders without the general partner’s consent, carries no vote on management, and gives its holder no right to compel distributions or to withdraw. An appraiser valuing that interest for a gift applies discounts for lack of control and lack of marketability that reflect what a hypothetical buyer would actually pay. Suppose parents contribute $5 million of rental real estate and give their children limited interests representing ninety percent of the partnership; the appraised value of those interests may be substantially less than $4.5 million, and only that appraised value is a taxable gift. The figures are illustrative, the discount depends on the facts and the appraisal, and no discount is guaranteed.

The gifting program

Interests are typically transferred in stages: annual exclusion gifts to each child and grandchild, which are $19,000 per recipient for 2026 according to the Internal Revenue Service, plus larger gifts that use lifetime exemption, or a sale to a grantor trust or a transfer to a GRAT. Each transfer is supported by an appraisal and reported on a gift tax return with the disclosure that starts the statute of limitations running. Interests given to a dynasty trust rather than outright keep the value out of the children’s estates and away from their creditors and divorces.

Why Families Use Them

• Consolidated management. One entity holds the family’s properties or investments, with one set of books, one manager, and one succession plan, rather than fractional deeds and joint accounts.
• Control with transfer. The parents can move most of the value to the next generation without giving up decisions about the assets during their lives.
• Estate and gift tax efficiency. Discounts reduce the exemption used for each transfer, and future appreciation on the transferred interests is out of the parents’ estates. Estate tax planning must account for the thresholds under New York, Connecticut, and federal law.
• Protection for the children’s interests. A judgment creditor of a limited partner generally obtains only a charging order against that partner’s distributions and cannot reach the partnership’s assets or force a sale. The partnership agreement’s transfer restrictions also keep interests from passing to a child’s spouse in a divorce.
• Education and succession. Children participate in an entity with real assets and real meetings before they inherit control.

What the IRS Looks For

The estate tax risk in an FLP is that the assets are pulled back into the parent’s estate at full value, without valuation discounts, on the theory that the parent retained the enjoyment of, or control over, the property transferred. Courts have found that result where parents kept using partnership assets to pay personal expenses, transferred nearly everything they owned so that the partnership had to support them, formed the partnership on a deathbed, ignored the agreement, commingled funds, or could point to no reason for the partnership except the discount. The same pattern of facts can also support a gift tax argument that the transfer was really an indirect gift of the underlying assets.

The following practices support the partnership from formation through annual administration:

• A documented non-tax purpose: consolidated management of real estate, protection from creditors, succession of a business, a common investment policy, or resolution of family co-ownership.
• Assets that fit the purpose. Real estate, a business, and investment portfolios do; a personal residence and personal-use assets do not.
• Enough kept outside the partnership for the parents’ living expenses, so they do not depend on partnership assets for personal spending.
• Formalities: a written agreement followed in practice, separate accounts, capital accounts maintained, annual meetings, and distributions made to all partners in proportion to their interests.
• A general partner that does not have unfettered discretion to benefit the parents, and, where the parents’ estates are large, an independent co-manager or trustee for the general partner interest.
• Qualified appraisals for every transfer and adequate disclosure on the gift tax returns.

FLP or LLC

Most of what a family limited partnership does can also be done with a limited liability company, and the choice between them turns on liability for the managing party, state filing and tax costs, the strength of the state’s charging order statute, and whether the family already has one structure in place. A general partner of a limited partnership is personally liable for the partnership’s obligations, which is why the general partner is usually an LLC; a manager of an LLC is not. New York, New Jersey, and Connecticut differ in their treatment of creditor remedies against LLC and partnership interests, and Wyoming and Nevada entities are often used where protection is the priority. We compare LLC and FLP structures in light of these considerations and handle the business formation requirements for the chosen structure.

Income Tax and Basis

A family limited partnership is a pass-through entity; income, gains, and deductions flow to the partners in proportion to their interests and are reported on their own returns. Interests given to children carry the parents’ basis, so a valuation discount for gift tax purposes does not reduce the income tax on a later sale, and assets inside the partnership do not receive a full step-up in basis at the parents’ deaths unless an election is made and the interest is included in the estate. For families whose estates are below the estate tax thresholds, the loss of the step-up in basis on gifted interests can outweigh the benefit. Contributing real estate to a partnership also raises transfer tax and mortgage questions, which must be addressed before the deed moves.

When an FLP May Be Unsuitable

A family limited partnership is generally unsuitable for a personal residence, for a family with no genuine reason to hold assets together, for parents who cannot afford to give up access to the contributed assets, or for a portfolio of marketable securities with nothing else to justify the structure. It may also be unsuitable for estates well below the New York, Connecticut, and federal thresholds, where the cost and the lost basis step-up exceed any benefit. And it provides little protection to the parents themselves, who control the general partner; parents seeking protection for their own assets need to consider other asset protection strategies.

Structuring and Maintaining Your Family Partnership

• An analysis with your CPA and appraiser of the assets, the purposes, the projected discounts, and the estate and income tax trade-offs.
• Formation of the partnership and the general partner entity in the appropriate state, and drafting of a partnership agreement with transfer restrictions, distribution provisions, and management terms that support both the discount and the family’s goals.
• Contribution of assets, including deeds, assignments, lender consents, and transfer tax filings.
• Design and administration of the gifting or sale program, including trusts to receive the interests, appraisals, and gift tax returns with adequate disclosure.
• Annual maintenance: meetings, minutes, distributions, capital accounts, and a review of how the partnership is actually being operated, through our Client Care Program.

Discuss Your Family’s Business and Investment Planning

If you want to transfer family business or investment interests while retaining management, we can compare an FLP with other structures and explain the responsibilities involved. Our attorneys practice in New York, New Jersey, and Connecticut. Contact Milvidskiy Law Group P.C. to schedule a consultation.

This page is provided for general informational purposes only and does not constitute legal advice. Laws differ by state and change over time. Tax figures are for 2026 and change annually. For advice about your situation, consult a qualified attorney.