What is a Family Limited Partnership?

The Family Limited Partnership (FLP) is a prominent strategy for asset protection and estate planning.
The asset protection and estate planning benefits of the FLP have been written about extensively in every national publication from the Wall Street Journal to Forbes Magazine.

Family Limited Partnerships (FLPs) are well established estate planning tools. Family wealth will be transferred into an FLP by the original partners for ultimate distribution to beneficiaries. Gifts of partnership interests will be made at a discount to beneficiaries utilizing the annual gift tax exclusion. Since the beneficiaries do not control investments or distributions, they may be eligible for valuation discounts at the time of transfer. This reduction in value provides lower estate and gift tax liability. Creditor protection is afforded as well, as in other limited partnerships.

For persons with taxable estates (over $11.4 million in 2019). It will be funded by real estate, stock or other investments.

An FLP s controlled by members of a family; like other limited partnerships, an FLP consists of general and limited partners. General partners control management and investment decisions and bear 100% of the liability. Limited partners do not participate in the management of the FLP and have limited liability.
The partnership itself isn't taxable - instead, the owners of a partnership report the partnership's income and deductions on their personal tax return, in proportion to their interests.

Generally, the senior family members (parents or grandparents) contribute assets in exchange for a small general partner interest and a large limited partner interest. The entity is controlled by the general partner who can be funded with as little as 1% of the total assets. The senior family members can then give all or a portion of the limited partnership interest to their children and grandchildren over time. This interest can go to the heirs directly, or be set aside in a trust.

Transferring limited partnership interests to family members reduces the taxable estate of senior family members. The senior family members transfer the asset to their children, removing it from their estates for federal estate tax purposes, while retaining control over the decisions and distributions of the investment.

An FLP also protects assets from claims of future creditors and spouses of failed marriages. Creditors may not force cash distributions or garnish the interest of a limited partner without the consent of the general partners. And in the event of a divorce, where a limited partner ceases to be a family member, the partnership documents can require a transfer back to the family for fair market value, keeping the asset within the family.