Overview
An FLP is not a trust - it is a limited partnership formed under your state's partnership act. You contribute assets and become the general partner, holding a small interest (typically 1-2%) but all management control. Family members receive limited partnership interests, which carry economic rights but no say in management and cannot be transferred freely. Because those interests are restricted and non-controlling, they are worth less than the underlying assets, which is what allows wealth to move to the next generation at a reduced transfer-tax value. An FLP works alongside a trust rather than replacing one: the partnership holds and manages the assets, and a trust often holds the partnership interests.
Best For
- Families holding real estate, a business, or an investment portfolio together
- Parents wanting to transfer wealth gradually while keeping control
- Owners seeking protection from the personal creditors of their children
- Families wanting to prevent assets from leaving in a divorce
- Anyone needing to keep an illiquid asset undivided across a generation
Key Features
- ✓ General partner keeps complete management control with a 1-2% interest
- ✓ Limited partners have economic rights but no management authority
- ✓ Transfers restricted by right of first refusal and consent requirements
- ✓ Charging order is the creditor's only remedy in most states
- ✓ Interests can be gifted incrementally each year
- ✓ Includes the Certificate of Limited Partnership and filing instructions
📊 Tax Benefits
- ✓ Valuation discounts for lack of control and lack of marketability
- ✓ Gifts of interests use less of your lifetime exemption
- ✓ Future appreciation accrues to the limited partners, outside your estate
- ✓ Income shifted to family members in lower tax brackets
- ✓ Partnership pays no federal income tax - income flows through to partners
Considerations
- The partnership does not exist until you file with the state
- IRC 2036 risk: retaining use or enjoyment can void the discount entirely
- Requires a qualified appraisal for every gift of an interest
- Formalities must be observed - separate books, accounts, no commingling
- The general partner has unlimited liability unless an LLC serves in that role
- Do not fund with a personal residence or personal-use assets
- Annual state fees, reports, and a partnership tax return are required
- Heavily scrutinized by the IRS and frequently litigated