Family limited partnerships: protection and tax benefits.

By Tresp, Day & Associates · July 19, 2022

Families with significant assets, a business, real estate, or investments, often use a family limited partnership to accomplish several goals at once: keep control, transfer wealth efficiently, and protect assets. Here is how the tax side works.

How an FLP is structured

Senior family members contribute assets to the partnership and hold the general-partner interest, retaining management control. They then gift limited-partnership interests, which carry economic value but little control, to children or trusts over time.

The valuation-discount benefit

Because a limited interest can’t control the partnership and can’t be readily sold, its fair market value is generally less than its proportionate share of the underlying assets. That means each gift of a limited interest transfers more underlying value per dollar of gift-tax exemption used, an efficient way to move appreciating assets to the next generation. (Discounts must be properly supported; coordinate with your tax advisor.)

Protection, too

The partnership form also provides a layer of asset protection: a creditor of a limited partner is generally limited to a “charging order,” not the underlying assets. Combined with the tax efficiency, that makes the FLP a versatile piece of many high-net-worth plans. Tresp, Day & Associates structures FLPs as part of coordinated estate and protection planning.