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What Is a Family Limited Partnership?


A family limited partnership (FLP) is a complex structure that serves a strategic purpose for individuals desiring to manage and protect family assets, limit liability and potentially secure tax benefits. This article targets families interested in estate planning, providing a comprehensive understanding of how FLPs function, their advantages and disadvantages, as well as tips on how to initiate one. A financial advisor can also help you determine whether an FLP or another legal structure is best for your family.

How a Family Limited Partnership Works

An FLP is a type of partnership intended to consolidate family businesses, investments and other assets under a unified structure. 

The primary participants of an FLP are the general and limited partners. General partners typically have control over asset management and decision-making, while limited partners are usually family members who contribute capital and hold limited roles in the daily business operations – or no roles at all. 

Establishing a Family Limited Partnership

Establishing an FLP requires careful planning and legal guidance. When done correctly, it can be a powerful tool for preserving and transferring family wealth while minimizing tax liabilities. It’s essential to consult with legal and financial professionals to navigate the complexities of FLP formation.

Here are six common steps to creating one:

  • Choose partners: The first step is to identify family members who will become partners in the FLP. These individuals will collectively manage and own the partnership’s assets.
  • Draft a partnership agreement: A well-crafted partnership agreement is essential. It should outline each partner’s rights, responsibilities and ownership percentages. Legal assistance is often necessary to ensure the agreement complies with state laws.
  • Contribute assets: Partners must contribute assets to the FLP. These can include real estate, investments or business interests. The FLP becomes the owner of these assets.
  • Valuation of assets: An independent appraiser may be required to determine the value of contributed assets. This valuation is crucial for tax purposes and to establish each partner’s initial capital account.
  • Formalize the FLP: File the necessary paperwork with the state where the FLP is established. This usually involves submitting a certificate of limited partnership.
  • Maintain compliance: Partners must adhere to the terms of the partnership agreement and follow all legal requirements, including regular meetings and record-keeping.

Advantages of a Family Limited Partnership

A woman looks over the family limited partnership (FLP) agreement that her family has drafted.

FLPs offer increased control over assets, asset protection and potentially valuable tax benefits, making them a strategic tool for wealth management and succession planning. Here are three common advantages:

Increased Control Over Assets

One of the primary advantages of establishing an FLP is the enhanced control it provides over family assets. The partnership structure allows the family to maintain centralized management, typically with one or more general partners responsible for decision-making. Limited partners, often family members, participate in the partnership but have limited influence, which can be a valuable tool for preserving family wealth and minimizing conflicts.

Asset Protection

FLPs are also effective in safeguarding family assets. By transferring assets into the partnership, those assets can gain protection from creditors and potential lawsuits. This protection is due to the limited liability of limited partners, who generally can’t be held personally responsible for the partnership’s debts or legal liabilities. This feature can be especially valuable for high-net-worth individuals looking to shield their wealth from unexpected financial challenges.

Tax Benefits

FLPs offer several tax advantages. They can facilitate the smooth transfer of assets between generations with reduced or even eliminated gift and estate taxes. Additionally, the income generated by the partnership can be distributed among family members in lower tax brackets, potentially reducing the overall tax burden. 

Disadvantages of Family Limited Partnerships

While FLPs offer numerous advantages, it’s important to be aware of the potential disadvantages that come with this financial structure. Here are three common disadvantages:

Cost of Setup

Setting up a Family Limited Partnership can be expensive. Legal and administrative fees, along with ongoing maintenance costs, can accumulate quickly. Additionally, you may need to hire professionals such as lawyers and accountants to ensure compliance with complex regulations. For smaller estates, these costs might outweigh the benefits.

Potential Family Conflicts

Another significant drawback of FLPs is the potential for family disputes. When family members become partners, disagreements over management, distribution of assets and decision-making can arise. These conflicts can be emotionally charged and even lead to legal battles, jeopardizing both the family’s wealth and relationships.

Liquidity Issues

FLPs often involve tying up assets in the partnership, making it challenging to access cash when needed. This lack of liquidity can be problematic during emergencies or when family members have different financial needs. Selling partnership interests can be complicated and may result in unfavorable tax consequences.

Tips for Starting a Family Limited Partnership

A father and son look over their family limited partnership (FLP) agreement.

If an FLP interests you, it’s essential to first identify your specific needs. Considerations should include the need for asset protection, the desire for estate planning and the necessity for greater control over family wealth.

When forming an FLP, you may look to assemble a capable team of advisors, including an estate planning attorney, a tax advisor and a financial advisor to guide you through the process. Precise roles and responsibilities of the partners, profit distribution and the terms of asset transfers should form part of the partnership agreement.

It’s also crucial to maintain continued monitoring and evaluation after starting an FLP. Your assets, such as cash, real estate or a family business should be transferred into the partnership in consultation with your advisors to ensure tax efficiency.

Bottom Line

FLPs offer a powerful tool for managing and protecting family wealth, limiting liability and capitalizing on potential tax advantages. However, they also come with potential drawbacks such as legal and setup costs, potential family conflicts and limited liquidity. While an FLP can be an effective estate planning strategy, its utility will depend greatly on individual financial goals, risk tolerance and family dynamics.

Estate Planning Tips

  • Planning for the management and distribution of your assets after you die is an important part of estate planning. While you should have will in place, you may also want to consider creating a trust, depending on your assets and needs. Here’s a closer look at the differences between these two important estate planning tools. 
  • A financial advisor with estate planning expertise can be a valuable partner in this important but potentially complex process. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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