Family LLC or Family Limited Partnership: Which Is Better for Estate Planning?

The short answer: for most families, a family LLC does everything a family limited partnership does with one fewer weakness. Both entities let the senior generation pool real estate, investments, or a business under one roof, keep management control, and give away interests to children over time at values discounted for lack of control and marketability. The difference is liability. In a limited partnership, someone must serve as general partner and that person is personally liable for the partnership’s debts; in an LLC, every member, including the managers, has limited liability. Limited partnerships still have a place, mainly where a family already has one or wants a particular tax or governance feature, but the LLC has become the default.

This article explains how the two entities compare on liability, control, taxes, valuation discounts, cost, and the estate tax trap that catches families who treat the entity as a formality. For a fuller description of how a family limited partnership operates, see our article on what a family limited partnership is and whether to form one.

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What Do a Family LLC and a Family Limited Partnership Have in Common?

Both are ordinary business entities used for a family purpose. Parents contribute assets, receive ownership interests, and then give interests to children and grandchildren, or to trusts for them, over a period of years. The operating agreement or partnership agreement, not state default law, sets who manages, who can sell, whether outsiders can ever become owners, and how income is distributed. Both are pass-through entities for income tax, so the entity files an information return and the owners report their shares.

The estate planning appeal is the same for each:

• Control with transfer. Parents can give away 90 percent of the economic value while retaining management through a small general partner or managing member interest.
• Consolidation. A dozen accounts and three rental properties become one set of interests that can be divided in any fraction, which makes annual gifts and equalization among children far easier than deeding fractional interests in real estate.
• Valuation discounts. A gift of a 10 percent non-controlling, non-marketable interest is worth less than 10 percent of the underlying assets, and appraisers routinely support discounts that reduce the gift and estate tax value.
• Restrictions on transfer. The agreement can bar sales to outsiders, give the family a right of first refusal, and keep an interest from passing to a child’s former spouse in a divorce.
• Creditor protection. A creditor of an individual owner is generally limited to a charging order against distributions, and cannot seize the entity’s assets. Our article on using a Wyoming LLC for New Jersey real estate explains how New Jersey’s charging order statute works for LLCs.

Where Do They Differ?

Liability of the person in charge. This is the decisive difference. A limited partnership must have at least one general partner, and the general partner is personally liable for the partnership’s obligations. If the partnership owns rental property and a tenant is injured, the general partner’s personal assets are exposed. Limited partners are protected only so long as they stay out of management. In an LLC, the managing member has the same limited liability as everyone else. Families that want a limited partnership structure now commonly form an LLC to serve as the general partner, which solves the problem at the cost of a second entity and a second set of filings.

Participation without penalty. Because limited partners risk their protection by managing, an FLP forces a sharp line between the generation that runs things and the generation that owns things. An LLC can give children management roles as they mature without changing their liability.

Flexibility. LLC statutes are generally more permissive about allocations, classes of interests, and governance than limited partnership statutes, though both allow considerable customization by agreement.

Familiarity. Appraisers, courts, and the IRS have decades of experience with limited partnership valuation, and some practitioners believe FLP discounts are marginally easier to defend. LLC interests are now appraised on the same principles, and the difference has narrowed to the point of being unimportant for most families.

Existing structures. A family that formed an FLP twenty years ago should not convert it without advice. Conversion can have tax consequences and can reopen questions the family has already resolved.

How Do Valuation Discounts Work, and Are They Still Available?

When a parent gives a child a 15 percent interest in an entity holding 2 million dollars of assets, the gift is not 300,000 dollars. The child cannot force a distribution, cannot compel a sale of the assets, cannot sell the interest to an outsider under the agreement, and has no say in management. An appraiser values what the child actually received, and discounts for lack of control and lack of marketability in the range that appraisers support, which varies with the assets and the agreement, can reduce the reported value substantially.

Congress limited this in 1990 through Chapter 14 of the Internal Revenue Code. Under Section 2704(b), when an interest is transferred to a family member and the family controls the entity, any “applicable restriction” on the entity’s ability to liquidate is disregarded in valuing the interest, if the restriction will lapse or the family can remove it. The statute exempts restrictions “imposed, or required to be imposed, by any Federal or State law,” which is why state default rules matter to appraisers. Treasury proposed regulations in August 2016 that would have expanded Section 2704 to disregard most liquidation restrictions and sharply curtail discounts for family entities. After a 2017 executive order directing a review of burdensome regulations, Treasury announced on October 4, 2017 that the proposed regulations would be withdrawn entirely. Discounts remain available under the law as it stood before 2016, supported by a qualified appraisal and an agreement whose restrictions have substance.

Two figures frame the decision. The federal gift and estate tax basic exclusion is 15 million dollars per person for 2026, so the great majority of families will owe no federal estate tax with or without an entity. The federal annual exclusion is 19,000 dollars per recipient for 2026, and discounted entity interests let a parent move more underlying value under it each year. For New York residents, whose state estate tax exemption is 7,350,000 dollars for 2026 with a cliff and a three-year add-back of taxable gifts, and for Connecticut residents, whose state has a 15 million dollar exemption and the country’s only state gift tax, the state analysis often matters more than the federal one.

What Is the Section 2036 Trap?

The IRS’s principal weapon against family entities is not the discount rules but Section 2036 of the Code, which includes in a decedent’s estate any property the decedent transferred while retaining the right to the income or the right, alone or with others, to designate who enjoys it. When it applies, the entity is ignored and the full value of the contributed assets, undiscounted, is taxed in the estate.

Two cases show how it happens. In Estate of Strangi v. Commissioner, affirmed by the Fifth Circuit in 2005, a man transferred nearly all of his assets to a family limited partnership shortly before his death, continued to live in the house the partnership now owned without paying rent, and had the partnership pay his personal expenses. The Tax Court found an implied agreement that he would keep enjoying the assets, included them in his estate under Section 2036(a)(1), and was affirmed. In Estate of Powell v. Commissioner, decided by the Tax Court in 2017, a son acting under a power of attorney transferred his dying mother’s assets to a limited partnership days before her death in exchange for a 99 percent limited partner interest. The court held that because she could join with the other partners to dissolve the partnership, she retained the right “in conjunction with” others to designate who would enjoy the property under Section 2036(a)(2), and the assets were included even though she held only a limited interest. Powell alarmed practitioners because the dissolution power it relied on exists in most partnership agreements.

The lessons apply equally to LLCs:

• Keep enough assets outside the entity to live on. A parent who needs entity distributions to pay for groceries has retained enjoyment.
• Never use entity funds for personal expenses, and pay fair rent for any entity property you use.
• Observe formalities: separate accounts, books, meetings where the agreement calls for them, and distributions made pro rata to all owners, not just the parent.
• Have a legitimate and significant non-tax reason for the entity, such as consolidated management, creditor protection, or succession, and document it.
• Do not form the entity on a deathbed. The transfers in both Strangi and Powell were made within weeks of death.
• Consider having someone other than the parent hold the management interest, or limiting the parent’s participation in decisions to dissolve or distribute.

What Does Each Entity Cost in New Jersey, New York, and Connecticut?

New Jersey treats the two alike at the Division of Revenue: 100 dollars to file a certificate of limited partnership or certificate of formation, and a 75-dollar annual report for either. Any entity with two or more owners that is taxed as a partnership also pays New Jersey’s partnership filing fee of 150 dollars per owner each year under Technical Bulletin TB-55, with an installment toward the following year due at the same time, so a family entity with two parents and three children owes 750 dollars a year in filing fees before any tax. Funding the entity with New Jersey real estate that carries a mortgage triggers the realty transfer fee on the mortgage balance, and funding it with a personal residence forfeits the homeowner’s capital gain exclusion.

New York adds two burdens for LLCs. Under Limited Liability Company Law section 206, a new LLC must publish notice of its formation once a week for six weeks in two newspapers designated by the county clerk and file a certificate of publication, a process that costs from a few hundred dollars upstate to well over a thousand in Manhattan. And under the New York LLC Transparency Act, effective January 1, 2026, LLCs formed or doing business in New York must report their beneficial owners to the Department of State, with existing LLCs given until January 1, 2027. New York limited partnerships have a parallel publication requirement.

Connecticut charges an 80-dollar annual report fee for LLCs, due between January 1 and March 31.

The federal Corporate Transparency Act no longer applies to domestic entities; the Financial Crimes Enforcement Network exempted them in March 2025 and made the exemption final on August 11, 2026.

Beyond fees, both entities require an appraisal for every year in which discounted gifts are made and a gift tax return reporting them, a partnership income tax return each year, and legal work to draft an agreement that can survive IRS scrutiny. Those recurring professional costs exceed the state fees many times over and are the real price of the strategy.

How Should a Family Choose?

• Choose an LLC when the family is forming a new entity, when the assets carry liability risk such as rental real estate, when children will take management roles over time, or when simplicity matters.
• Choose a limited partnership when the family already has one that works, when a lender or co-investor requires the form, or when specific advice favors it, and use an LLC as the general partner.
• Choose neither when the estate is comfortably below the federal and applicable state exemptions and there is no liability or management reason for an entity. A revocable trust and clear beneficiary designations may achieve the family’s goals at a fraction of the cost.
• Never choose a corporation to hold family real estate or investments. Our article on why a corporation is the wrong vehicle for real estate explains the double tax and the loss of the basis step-up.

Whichever entity is chosen, the interests can and often should be given to trusts for the children rather than to the children outright, which adds creditor and divorce protection for the next generation and keeps the family’s plan intact if a child dies young.

Plan Well. Live Better.

A family entity is a tool for families with something worth managing together, and it works only when the family treats it as real. At Milvidskiy Law Group, we form and maintain family LLCs and limited partnerships, coordinate the appraisals and gift tax returns that make discounted gifts defensible, and integrate the entity with the trusts and wills that carry the plan forward. Learn more about our estate planning services.

This article is for general informational purposes only and does not constitute legal or tax advice. Reading it does not create an attorney-client relationship. Entity, gift, and estate tax rules depend on the family’s facts and the terms of the governing agreement, and the law changes. Code sections, cases, fees, and figures described were verified in September 2026 and should be confirmed before relying on them.