You’ve spent a lifetime building your legacy, so how can you protect it for the next generation? One wealth transfer planning strategy that is gaining popularity in jurisdictions, including the US, is to set up a family limited partnership, or FLP. This is when two or more family members pool their assets to run a business together, an arrangement that can reap significant benefits for wealth transfer and estate planning.
Family limited partnerships (FLPs) are an effective way to protect assets, minimize taxes, and transfer wealth efficiently. In this guide, we’ll delve into the role of FLPs in estate planning: their advantages, how to create one, and some key things to consider.
FLPs are a valuable tool for transferring wealth within a family. At its core, a family-limited partnership is much like a traditional limited partnership, but with one key difference: all the partners are members of the same family. These partners fall into two categories:
As a result, FLPs give families more agency when it comes to wealth transfer. General partners can keep control of their assets while gradually introducing younger family members to the business. It’s a neat way to reduce gift and estate taxes while also giving you time to choose your successors and set your own timetable for transferring the business and assets.
While a family-limited partnership can be an effective wealth transfer strategy, it has to be set up and administered correctly. Here are the key steps to follow:
Give your FLP a name, making sure it is unique to your family and available within your jurisdiction. You’ll also need to file a limited partnership certificate and pay any associated fees.
Create the partnership agreement, naming the general and limited partners and detailing their roles and responsibilities. The agreement should also set out the terms and conditions of the partnership.
Now, you can start transferring assets into the FLP. These assets might include cash, real estate properties, valuable collectibles, securities, or small businesses, and ownership can be given to the limited partners gradually or all in one go. It’s important to have the assets appraised by an independent appraiser and to transfer their legal titles.
There’s a compelling case for integrating family-limited partnerships into your estate planning. Let’s take a look at the key advantages:
FLPs transfer ownership of your assets from you and your family as individuals into a separate legal entity. This means they will be shielded from being seized by creditors.
FLPs allow you to maximize annual tax exclusions and lifetime estate and gift tax exemptions, making them a tax-efficient way of transferring your wealth to the next generation.
An FLP puts you in control. As a general partner, you can continue to make day-to-day decisions even if you only hold a small percentage of the value.
While family-limited partnerships offer plenty of benefits, there are several things to consider.
The main point to remember is that an FLP is, first and foremost, a business entity—and the tax authorities will be sure to scrutinize it. So, it’s crucial to adhere to all the formalities of running a business: take minutes of every meeting and ensure the general partner is paid appropriate compensation for their work.
Then there’s the cost of creating your FLP and running it effectively. For example, you’ll need to pay filing fees when you set up the partnership and engage professionals to help keep you compliant once everything is up and running.
It’s also important to be aware of the complexities associated with a family-limited partnership. If you make transfers to minors, you may have to set up a trust to administer them. Additionally, general partners have unlimited liability and may be vulnerable to potential lawsuits or judgments.
The beauty of an FLP lies in its flexibility. It allows individuals to retain control over their assets while gifting them to family members. A well-crafted family-limited partnership can, therefore, offer the best of both worlds.
One of the biggest benefits of an FLP is that it can be changed over time, with partners having the ability to modify the partnership agreement at any time. General partners can transfer their assets over time, gradually reducing their own share to just a small percentage while still keeping hold of the reins. That way, they can take a tax-efficient approach to passing on their wealth while securing the family business until their beneficiaries are ready to take over.
Family limited partnerships have long been considered a powerful and strategic approach to wealth transfer, but they have recently gained popularity. In the US, the federal estate plan exemption is set to drop significantly, from $12.06 million to around $6 million, in 2026. As a result, American families are seeking new ways to protect their wealth for the next generation.
FLPs offer a compelling solution. For example, the US gift tax exclusion for 2023 is $17,000 per recipient. This means an individual could transfer $17,000 of FLP shares to each of their children and grandchildren this year without incurring any tax liabilities.
As we’ve seen, FLPs offer several advantages especially when it comes to taxation. Creating a family-limited partnership can potentially reduce estate taxes as well as maximize annual gift exclusions during your lifetime. This is because the assets pass from your ownership into the partnership and are therefore not considered part of the estate.
Additionally, the way an FLP is structured gives rise to another tax benefit. Limited partners have a minority position in the partnership, with no involvement in the day-to-day management of the business. This means that their assets are illiquid—they can’t be sold easily. This can lower their fair market value by 30 percent or more, and the resulting valuation discount allows parents to transfer more property within the annual exclusion amount.
Family-limited partnerships are an effective strategy for families looking to safeguard their assets. They offer crucial protection if, for example, a supplier sues your business for breach of contract or if you are struggling financially and creditors are coming after you. By transferring your assets to a company, they can also help protect your personal privacy.
Limited partners are not responsible for the operation of the business, which means that any interests they hold cannot be seized by their personal creditors. It’s important to remember, however, that general partners are still liable for lawsuits and creditor claims. So, sometimes, setting up a limited liability company (LLC) to act as the general partner can be advisable.
Above all, family-limited partnerships are businesses, and they need to be run accordingly. So, if you’re considering creating an FLP for your family, seeking professional advice is essential. The tax implications can be complex, and the IRS will undoubtedly be paying close attention. As well as specialists in estate planning, you’ll need assistance from independent appraisers to determine the value of the assets being transferred.
Ready to start your search? It’s a good idea to ask for a referral, either from a family that has successfully created an FLP or from another attorney that you know. When you’re considering an estate planning attorney, check their credentials: certifications, membership of industry organizations, and which law school they attended. Finally, nothing beats meeting a potential provider in person. Ask for a free consultation to see if this is someone you can work with.
In summary, family-limited partnerships can be a very effective pillar of wealth transfer and estate planning. By transferring ownership of assets into a business entity and gifting shares to limited partners over time, you can maintain control of your legacy while also reducing your tax obligations and the tax that will be due on your estate.
It’s important to remember, however, that an FLP is, first and foremost, a business entity, so it's essential to consult professional advisors along the way.
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