Updated 6/23/26

A Family Limited Partnership (FLP) can be used as a strategic estate planning tool that allows families to manage assets, conserve wealth, and potentially reduce overall tax burdens. For families with valuable businesses, real estate, or investment assets, transferring wealth while keeping governance and continuity intact is a top priority. An FLP is a legal entity that lets family members own and manage assets together.  Often, FLPs are used to preserve a family business or shield assets from creditors.

General partners vs limited partners

• General partners manage assets and make decisions.
• Limited partners have an economic interest in the FLP but have little to no authority or liability.

Many families use a separate LLC as the general partner to help manage liability risk because general partners have unlimited personal liability for debts.

How a Family Limited Partnership works

1. A family member, usually a parent or grandparent, creates the FLP, usually with the help of an estate planning attorney and tax specialist.
2. Assets are transferred into the FLP.
3. General partners retain management authority.
4. Limited partnership interests may be gifted or transferred to heirs.
5. The FLP must operate as a real entity with separate records, accounts, and governance. 

Family Limited Partnership example

To illustrate, let’s say two parents place a family-owned rental property into an FLP. They name an LLC where they are the only members as general partners, and their children as limited partners. In this example, the parents would continue managing the property, collecting rent, and making decisions, such as renovations or upgrades. The children would have no responsibilities.

Over time, the parents can gift ownership shares to their children, gradually transferring wealth to them while retaining full control over the property. Eventually, with proper planning, an adult child could become a general partner, ensuring a smooth succession of management.

Real estate held in an FLP

Parents can transfer non-controlling limited partnership interests to children over time while keeping management authority. This is especially helpful for real estate that the parents still maintain but would like their heirs to gain assets from.

Family business succession

For family businesses, FLPs allow owners to centralize ownership. Partners are family members instead of unknown stakeholders. FLPs also allow the next generation to be involved in business without making permanent decisions. When business owners exit, the children can become a new General Partner, ensuring a smooth transition.

Why families use FLPs in estate planning

1. Centralized asset management
   Transferring wealth and ownership to heirs can be a seamless process using an FLP. Estates can be owned by multiple family members through FLPs, and decision-making is streamlined.
2. Wealth transfer during life
   General partners can also distribute wealth to limited partners through interests, which are taxed at a lower rate. Parents can transfer interests to children while they’re still alive, so when they do pass, the size of the taxable estate is reduced greatly.
3. Potential estate and gift tax benefits
   Limited partnership interests are taxed at a lower rate due to limited partners having little to no authority in everyday management, and gift tax benefits allow donors to gift up to $19,000 per recipient annually without filing a gift tax return or using lifetime exemptions. 
4. Asset protection benefits
   1. Protection from creditors. Because limited partners don’t have control over FLP decisions, a creditor typically can’t seize or force the sale of a limited partner’s ownership stake.

   2. Personal liability protection. Limited partners are generally shielded from personal liability for the FLP’s debts and other obligations, meaning their personal assets are off-limits if the partnership encounters financial issues.

      However, general partners can still be held liable for the actions and obligations of the FLP, and their assets are not protected. This is the main reason why many families create a separate LLC to be the general partner. 

5. Family governance and succession planning
   Business practices such as partnership agreements, distribution rules, voting rights, transfer restrictions, and succession provisions are all done within the family. This is especially useful for families who own businesses or real estate, or people who want a structured way to transfer wealth while maintaining control.

2026 estate and gift tax rules to know

• The One Big Beautiful Bill increased the basic exclusion amount to $15 million for the calendar year of 2026.
• The IRS gift tax FAQ lists the 2026 annual exclusion at $19,000 per recipient.
• The higher exemptions do not remove the need for planning, especially for
  families with appreciating assets, state estate tax exposure, business succession
  needs, or creditor concerns.

FLP valuation discounts explained

A valuation discount allows for the reduction of the taxable value of a transferred interest in a partnership. There are two main types of valuation discounts: 

1. Lack of control discount: Limited partners do not hold the same power as stakeholders. They do not take an active role in business operations, and as such, their interests are eligible for a discount.
2. Lack of marketability discount: Privately held FLP interests are harder to trade, in part due to transfer restrictions. Because these interests are less liquid than publicly traded assets, they are eligible for a discount.

These discounts are fact-specific and must adhere to certain requirements. Valuation discounts can be challenged by the IRS, so work with an attorney or appraiser to ensure an appropriate discount is claimed.

IRS scrutiny and FLP risks:

• The FLP must have a real non-tax purpose. Common purposes include: centralized management, business succession, creditor protection, family governance, and preserving real estate or business assets.
• Retained control and Section 2036 risk. Section 2036 says if the original owner of an estate retains too much control, income, or enjoyment of transferred assets, those assets may be taxed.
• Plan ahead and plan well. In the Estate of Fields v. Commissioner case, the tax discount was revoked from the Fields estate due to a weak non-tax purpose. Deathbed transfers, weak business purpose, retained control, and poor formalities contributed to the outcome of the case.

Who should consider an FLP?

FLP vs Trust vs Family LLC

How to set up an FLP

1. Define the planning purpose. State the non-tax purpose clearly.
2. Identify the right assets. Discuss family business interests, real estate, and investment assets.
3. Choose general and limited partners. Decide who will run the day-to-day operations and who will share the value. Consider forming a family LLC to be a general partner for asset protection.
4. Draft the partnership agreement. Decide voting rights, distributions, restrictions on transfers, succession, dispute resolution, and buy-sell terms.
5. Transfer assets and keep records. Keep documentation of separate accounts, titles, appraisals, meeting minutes, and tax filings.
6. Obtain a professional valuation. Consult with an expert on possible valuation discounts.
7. Coordinate gifting and tax reporting. Use gift tax exemptions and fill out Form 709 as needed.
8. Review the FLP annually. Review updated tax laws, state laws, family structure, asset values, and family goals.

Common FLP mistakes to avoid

• Creating the FLP only for tax savings.
• Waiting until a health crisis or deathbed moment to plan.
• Mixing personal and FLP assets.
• Failing to keep records.
• Taking distributions outside of the agreement.
• Retaining too much control or benefit.
• Overstating valuation discounts.
• Not coordinating attorney, CPA, appraiser, and advisor roles.

Is an FLP for estate planning right for your family?

An FLP may be worth discussing if your family has meaningful assets, a business or real estate ownership issue, estate tax exposure, or a need for structured family governance. It may not be worth the cost or complexity for simpler estates.

To see if an FLP is right for your estate, contact a financial advisor today.

FAQs about FLPs for estate planning

What does an FLP stand for in estate planning?

A Family Limited Partnership places assets into a protected partnership to reduce taxes and increase protections from creditors. This is done by transferring wealth to limited partners who gain valuation discounts. FLPs can also be used to ensure a smooth transition of the estate between generations.

How does an FLP reduce estate taxes?

Assets in an FLP often qualify for valuation discounts because of a lack of marketability and limited partners have a lack of control. FLPs can also contribute to estate reduction. However, the discounts are heavily monitored by the IRS and depend on structure and compliance.

Can parents keep control of assets in an FLP?

Yes, often through general partner interests, but too much retained control can create a tax risk.

What assets are best suited for an FLP?

Family businesses, income-producing real estate, and assets needing centralized management are well-suited for an FLP.

Is an FLP better than a trust?

FLPs and trusts are two separate ways of handling estates and can work together. FLPs focus on transferring assets during life, whereas trusts focus on transferring assets after the grantor has passed.

Are FLPs risky?

FLPs can be risky due to legal fees, IRS scrutiny, valuation risk, administrative burden, liquidity constraints, and family conflict. However, consulting with an attorney and keeping proper records can help mitigate these risks.

Do FLPs protect assets from creditors?

Limited partners do have asset protection, as they do not control operations. General partners who control operations do NOT have asset protection.

Who should help create an FLP?

An attorney, CPA / tax advisor, valuation professional, or financial advisor can help create an FLP.

This information is not intended to provide individualized tax or legal advice. Discuss your specific situation with a qualified tax or legal professional.

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