Family Limited Partnerships and Building Generational Wealth
Brad Shermeto, CPA, CFP
What is a Family Limited Partnership or FLP?
A Family Limited Partnership (FLP) is a type of business structure that allows family members to own a variety of types of family-owned assets as either general or limited partners. Families use FLPs as an estate planning tool to pool resources for new and existing investments to the younger generations, sometimes at significant discounts.
FLPs have two types of partners: general (typically those of the older generation) and limited (those of the younger generation). General partners are responsible for the management of the partnership and handling the operation of business activities within the entity. General partners are personally responsible for partnership debts as if they were their own. Limited partners, however, are not involved in the management of business activities, and only share in financial aspects of the partnership’s investment. They are not personally liable for partnership liabilities; they have “limited liability” and are therefore called “limited partners.”
FLPs and Building Generational Wealth
FLPs make it easy to transfer partnership interests to the next generation.
Partnership interests can be transferred to family members of the next generation which will freeze the value of the interests as of the date of the gift and will remove the assets from the estate of the donor. Oftentimes, gifts of partnership interests can be discounted for lack of marketability or lack of control(depending upon the terms of the partnership agreement and the amount of the gift in question). Overall, this can result in a large reduction in the size of the gift, thereby preserving the donor’s lifetime estate and gift tax exemption.
If a donor would like to slowly pass their partnership interest to the next generation, they can gift the annual gift tax exclusion amount ($19,000 for 2025) each year to each donee/limited partner. For example, if Father would like to gift partnership interests to his two children in 2025, he is able to gift a discounted interest equal to $19,000 to Child 1, and a discounted interest equal to $19,000 to Child 2. If these are the only gifts from Father for 2025, he would not have to complete a gift tax return for 2025. This method will lower the amount of Father’s estate each year, as well as increase the partnership interests owned by the next generation.
FLPs and Partnership Agreements
The FLP will have a formal partnership agreement and the general partner will still manage the operations of the business (even if they have a minority share in the partnership interests). This allows a certain degree of control to be retained even if limited partnership interests are not included in the donor’s gross estate.
However, it is important to note that the partnership agreement should not give ultimate control to the general partners. If general partners are given too much control in the partnership agreement, it is possible that the limited partners’ interests will be disallowed by the IRS and all partnership interests will be included in the estate of the general partner.
If you have any questions about Family Limited Partnerships or think it could be the right fit for your family, please contact your Louis Plung and Company trusted advisor or email [email protected].
