What is a Family Limited Partnership (FLP) and how does it function?

A Family Limited Partnership (FLP) is essentially a type of limited partnership among members of a family. A limited partnership comprises general partners (who handle management) and limited partners (who are passive investors). The general partners bear unrestricted personal liability for partnership obligations, while the limited partners have no liability beyond their capital contributions. Normally, the older generation family members establish the partnership by contributing assets to it in exchange for a small general partnership interest and a significant limited partnership interest. Subsequently, the limited partnership interests are transferred to their children and/or grandchildren while maintaining control over the partnership through the general partnership interests.
The FLP offers several advantages: The transfer of limited partnership interests to family members minimizes the taxable estate of the older family members while allowing them to retain control over investment decisions and distributions. As the limited partners lack control over investments or distributions, they may qualify for valuation discounts during transfer, thereby reducing the value of their holdings for gift and estate tax purposes. Lastly, a properly designed FLP can possess characteristics that protect against creditors, given that the general partners are not obligated to distribute partnership earnings.

A Family Limited Partnership (FLP) is essentially a type of limited partnership among members of a family. A limited partnership consists of both general partners (who oversee management) and limited partners (who serve as passive investors). General partners assume personal liability without limits for partnership obligations, while limited partners have no liability beyond the capital they contribute. Typically, the older generation family members establish the partnership by contributing assets to receive a small general partnership interest and a large limited partnership interest. Afterward, they transfer the limited partnership interests to their children and/or grandchildren while retaining control of the partnership through the general partnership interests.
The FLP offers several advantages: transferring limited partnership interests to family members helps reduce the taxable estate of the older family members while allowing them to maintain control over investment decisions and distributions. Since the limited partners cannot influence investments or distributions, they may be eligible for valuation discounts during the transfer process, which lowers the value of their holdings for gift and estate tax purposes. Lastly, a well-structured FLP may possess characteristics that protect against creditors because the general partners are not obliged to distribute partnership earnings.