What Is a Family Limited Partnership and Should I Form One?

A family limited partnership (FLP) is a business structure that allows family members to pool assets for business and investing purposes. Family limited partnerships can also protect personal assets, reduce taxes, and be used for estate planning and business succession. Their potential estate and tax advantages make FLPs an option for families that want to retain control of assets for multiple generations.

How a Family Limited Partnership Works

Limited partnerships are one of the basic business structures that can be selected at startup.

Under a limited partnership structure, there is at least one general partner with unlimited liability and at least one partner with limited liability.

• The partner(s) with limited liability lack control over day-to-day business management. In turn, their personal assets are shielded from business debts and liabilities.
• Creditors can go after the general partner(s) with unlimited liability if there are problems with the business.

Family limited partnerships function in much the same way as limited partnerships, except that all the partners are family members.

In an FLP, family members contribute assets to the partnership in exchange for ownership interests. General partners, often parents or senior family members, typically manage the partnership, while limited partners, such as children or grandchildren, share the profits.

• Parents can gradually gift shares of the FLP to their children or grandchildren over time. This reduces the value of their taxable estate and allows for the transfer of wealth while maintaining control over the assets.
• FLP interests can be valued at a discount for estate and gift tax purposes due to limited control and lack of marketability, potentially reducing the tax burden on the transfer of assets.

The partnership agreement governs terms that include the distribution of income, roles of partners, and rules for transferring ownership. For example, restrictions can be placed to prevent limited partnership interests from being sold outside the family, ensuring long-term asset retention.

It is possible for limited partners to become general partners in the FLP. This might take place as part of a business succession or estate planning strategy to transition greater ownership and control to the next generation. The partners can modify the partnership agreement to reflect the change in partner status.

Ways to Use a Family Partnership

FLPs are primarily used as a business structure for owning and passing down a family business. However, they are flexible enough to be used for other purposes, such as estate planning, business succession, and investing.

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Business Ownership and Succession

When used to own and run a family business, family members can buy shares in the FLP and become general or limited partners. General partners manage the business and are liable for its debts, while limited partners are passive investors and not liable for the debts of the business.

This balance of power can change over time as younger family members take over for older family members and assume greater responsibility (and risk) in the business. FLPs facilitate the transition of a family business to younger generations by allowing them to gradually gain ownership while the senior generation maintains operational control.

FLPs are often used to consolidate a family’s real estate assets, including those that are part of a business venture. For example, family members might pool their resources to buy a multiunit apartment building or a portfolio of separate properties. As the property generates income from the rents, the mortgage is paid off and dividends are distributed to the partners/family members.

Placing a family business in a family partnership can be an alternative to placing the business in a trust. An advantage of this is that family members who receive partnership shares can still control the business, which may not be allowable with a trust.

Other advantages of using the FLP structure for a family business include:

• Personal assets that are transferred into an FLP are no longer personal assets—they are business assets that have stronger protections from creditors, tax collectors, and litigants than assets owned by an individual. The level of protection depends on whether someone is a limited partner or a general partner.
• Every family member can make a different investment in the business and have a different rate of return on their investment.
• General partners can have unequal responsibilities in running the business and be awarded unequal compensation for their level of involvement and risk.
• Restrictions can be placed on FLP asset transfers, allowing, for example, general partners who are parents to prevent a child’s shares from ending up in a spouse’s hands if they get divorced.
• An FLP is considered a pass-through entity for tax purposes and thus avoids double taxation. Each partner pays dividend taxes on their personal income tax return, rather than the entity itself paying taxes.
• Transfers of FLP shares can be made under the annual gift-tax exclusion ($18,000 per individual in 2024 and $19,000 in 2025).
• If gifted partnership interests increase in value, they are generally not subject to capital gains tax.

Outside these individual benefits, FLPs offer general flexibility in the form of the partnership agreement. The agreement can be changed at any time to reflect changing family circumstances and dynamics that might affect the business or the succession plan. This process usually involves the general partner(s) initiating the amendment and gaining approval from the limited partners based on the terms outlined in the agreement.

Estate Planning

While business succession planning is an important aspect of estate planning, FLPs are useful for more than just transferring leadership and management responsibilities from older family members to younger family members. They can also be used to transfer family-owned assets, such as a family vacation home, in a way that avoids common issues associated with family property ownership. Here’s how:

• The vacation home is transferred into the FLP as a partnership asset. This consolidates ownership under a single entity instead of dividing the property among individual family members.
• Typically, parents or senior family members act as general partners, retaining control over the property’s management and use.
  Children or other family members are designated as limited partners, holding ownership interests but without direct control.
• The partnership agreement can outline how maintenance costs, taxes, and expenses are shared among family members.
  Guidelines for property use (e.g., vacation scheduling) can be established in the partnership agreement to prevent disputes.
• The FLP agreement can restrict ownership transfers, ensuring the property remains within the family. General partners can make long-term decisions about the property’s use or sale, preventing fragmentation of ownership.
• Placing the vacation home in an FLP protects it from the liabilities of individual family members. Creditors of an individual family member cannot seize the home due to the separation of personal and partnership assets.
• FLPs can help avoid probate by transferring ownership of assets to the FLP entity, which means that the assets themselves are not directly subject to probate court proceedings.

To illustrate how an FLP strategy can be used for a family vacation home, suppose that parents own a second house in Florida valued at $1 million. They transfer the property into an FLP and, as general partners, they manage the home and gradually gift limited partnership interests to their children, taking advantage of annual gift tax exclusions. Over time, the children gain full ownership of the FLP, preserving the vacation home as a family legacy without probate or significant estate tax burdens.

FLPs for Investments

An FLP can be used for investing purposes as well.

Warren Buffet, one of the most renowned investors of all time, started a partnership in the 1950s that brought together money from family members using just $100 of his own money. While his partnership was not strictly a family partnership, since friends were also involved, Buffet’s success story shows how families can utilize the FLP structure for mutual financial growth, allowing them to invest more — and earn more — as a group than they could as individuals. They can then take advantage of the FLP structure to maximize its other benefits, like liability protection and tax savings.

The Buffet story is also a good illustration of how FLPs can have complex, case-specific terms in the partnership agreement. One of Buffet’s limited partners earned 4 percent of the total investment profits. The remaining profits were split 75 percent (partner) – 25 percent (Buffet). The partner could only withdraw money once annually on a specified day. Buffet only provided a yearly summary of his investing results, with no disclosures about how he invested the money.

Is a Family Limited Partnership Right For You?

If you’re looking for a powerful and flexible tool for preserving your family’s generational wealth, an FLP might make sense.

Despite its many advantages, however, there are some possible downsides to keep in mind. One disadvantage is that, although the partnership’s assets are generally protected from outside creditors, the actions of one partner can expose other partners to risk. Due to the differing levels of liability protection, those risks may not be shared equally.

While they are useful as a holding company for investment and real estate assets, FLPs may not be the best choice for every type of asset. Families interested strictly in estate planning might alternately look to trusts and other estate planning tools. But families interested in consolidating their assets and transferring them efficiently within the family may want to discuss FLPs in greater detail with a local estate planning attorney.