Family Limited Partnership (FLP)

Key takeaways

• An FLP is a limited partnership owned by two or more family members used to operate or hold a family business or assets.
• There are two partner types: general partners (manage the business; unlimited liability) and limited partners (no management role; limited liability).
• FLPs are commonly used to consolidate family assets, facilitate transfers to heirs, and obtain certain gift and estate tax benefits.
• FLPs involve complexity and costs, and poorly managed FLPs can expose partners to business liabilities.

What is an FLP?

A family limited partnership (FLP) is a legal structure in which related family members pool capital to run a business or hold assets (for example, real estate or investments). Ownership is divided into partnership interests (units or shares) governed by a partnership agreement that specifies management duties, profit distribution, transfer restrictions, and other rules.

How FLPs work

Partner roles

• General partners: Manage day‑to‑day operations and make investment decisions. They typically have unlimited liability for partnership obligations.
• Limited partners: Invest capital but do not participate in management; their liability is generally limited to their investment.

Typical setup steps

1. Family members form the FLP and draft a partnership agreement.
2. The FLP issues limited partnership interests to family investors in exchange for capital.
3. The general partner uses partnership capital (and often external financing) to operate or acquire assets.
4. Profits, dividends, and capital appreciation are distributed according to the partnership agreement.
5. Transfer restrictions (e.g., minimum holding periods, age conditions, UTMA accounts for minors) are often included to control how interests pass to heirs.

Example (illustrative)

A family plans a $1 million real estate project requiring $500,000 equity. The FLP issues 5,000 limited partnership shares at $100 each to raise $500,000. The general partner contributes a portion, family members buy the remainder, the FLP secures financing for the balance, and rental income is used to service debt and distribute profits.

Advantages

• Estate and gift planning: Transferring FLP interests can remove assets from a partner’s taxable estate while retaining family control over underlying assets.
• Annual gift exclusion: FLP interests can be gifted up to the annual exclusion amount without using lifetime exemption. (As of 2025: $19,000 per individual; $38,000 for married couples.)
• Control and protection: Partnership agreements can restrict transfers, set age or maturity conditions, and protect assets from mismanagement by beneficiaries.
• Consolidation: FLPs centralize management of family investments, making administration and succession planning more orderly.

Disadvantages and risks

• Cost and complexity: Forming and maintaining an FLP typically requires tax, legal, and accounting professionals.
• Management risk: General partners’ decisions determine success; mismanagement can create losses and liabilities for all partners.
• Potential tax and valuation scrutiny: Transfers of partnership interests may be challenged by tax authorities if not properly structured and documented.
• Liquidity and transferability: Restrictions on selling or transferring interests can limit beneficiaries’ ability to access cash.
• Control issues: Excessive control by general partners can undermine the intended tax or gift benefits.

Practical considerations

• FLPs are legal and tax‑sensitive structures—requirements and tax treatment vary by jurisdiction.
• Proper valuation, clear partnership agreements, and adherence to formalities are essential to preserve tax benefits.
• Professional advice from estate planning attorneys, tax advisors, and accountants is strongly recommended before creating or modifying an FLP.

FAQs

Q: How many people are required to form an FLP?
A: At least two family members must form a limited partnership (one or more can be general partners).

Q: Is it expensive to operate an FLP?
A: It can be, due to initial setup costs and ongoing professional fees for tax, legal, and accounting services.

Q: Can FLP interests be gifted tax‑free?
A: Interests can be gifted up to the annual gift tax exclusion each year; larger transfers may use lifetime exemptions or trigger gift tax depending on amounts and valuation.

Bottom line

An FLP is a useful vehicle for families that want centralized management of assets and structured wealth transfers to heirs while seeking gift and estate planning advantages. However, FLPs are complex, costly to establish, and carry management and tax risks. Families should work with qualified legal and tax professionals to determine whether an FLP is appropriate and to design it correctly.