Family Limited Partnerships: The Estate Planning Tool Few Families Understand

When most people think about estate planning, they think about wills or revocable living trusts. For many families, those are the right tools — and they do an excellent job of keeping things organized and out of probate.

But for families with larger taxable estates, those tools may not address everything. Over time, strong investment growth, real estate appreciation, or a business can push a family’s wealth into ranges where estate taxes, asset protection, and generational planning become bigger concerns.

That’s where a Family Limited Partnership (FLP) can sometimes add value. It’s not for everyone, but for families who qualify, it offers a way to keep control, shift future growth out of the estate, and create a long-term framework for managing wealth as a family.

What Is an FLP?

A Family Limited Partnership is basically a family investment company.

• General Partners (GPs): usually the parents. They run the partnership, make decisions, and stay in control.

• Limited Partners (LPs): usually the kids (or trusts for them). They share in the growth but don’t get a say in management.

So, parents are the CEOs. Kids are shareholders.

Why Families Use Them

FLPs are popular for three big reasons:

1. Lower Estate and Gift Taxes

If parents gift LP units, they’re usually valued at a discount — often 20–40%. Why? Because LPs don’t control anything and can’t sell easily.

Example: $5M of stock put into an FLP might be valued at $3.75M for gift tax purposes. Parents can move more wealth using less exemption.

2. Keep Control

Even after gifting 90% of the value, parents still make the calls as GPs: when to distribute money, how to invest, how to run things.

3. Protect Assets

FLPs can also serve as a shield. Creditors usually can’t touch what’s inside the partnership. At most, they can get a lien on distributions (a “charging order”), which isn’t attractive to pursue.

This protection can extend to marital situations as well. If children or heirs receive LP interests inside protective trusts, those interests are generally kept separate from marital property. In a divorce, the FLP units are far harder for an ex-spouse to access, since they don’t provide direct control or liquidity. Instead of inheriting assets outright — where they might later be exposed — the next generation receives a stake that is better insulated from both creditors and potential divorces.

How It Works

Parents fund the FLP with taxable assets (brokerage accounts, real estate, or a family business).

They gift LP interests to children or, more often, to protective trusts for those children.

• Protective trusts keep wealth safer. Instead of giving assets outright — where they could be lost to creditors, lawsuits, or divorce — the trust holds the LP units on behalf of the child. This ensures the inheritance stays in the family line and under long-term protection.

The gift is valued at a discount. Why? Because limited partners don’t control management decisions and can’t easily sell their interest on the open market. Appraisers typically apply 20–40% discounts for this lack of control and lack of marketability. That means $1M of assets in an FLP might transfer at a gift-tax value of only $600K–$800K.

Future growth on those LP units then happens outside the parents’ estate, while the parents retain full control as general partners.

Example: $5M Today → $15M Tomorrow

• Parents put $5M into an FLP.

• A valuation discount brings the gift value down to $3.75M.

• Parents gift those LP units into trusts for their kids, using $3.75M of exemption instead of $5M.

Fifteen years later:

• Assets grow to $12M–$15M.

• That growth happens outside the estate.

• Parents still control everything as GPs.

Without planning, that growth could push them into estate tax territory if exemptions drop. With an FLP, most of it avoids tax.

Gifting Strategies: Timing and Cadence

FLPs work best when paired with a clear gifting plan.

• Start Early: The sooner you gift, the more growth you shift out of the estate. Waiting until assets have already appreciated means shifting less.

• Annual Gifts: Parents can give $19,000 each, per child, per year (2025). With 3 kids, that’s $114,000/year tax-free. Thanks to discounts, that may move ~$163K of underlying value each year.

• Use Lifetime Exemption: Larger transfers can use the lifetime gift/estate exemption (about $13.99M per person in 2025). Under the newly enacted One Big Beautiful Bill Act, beginning January 1, 2026, that exemption will permanently increase to $15M per person ($30M per married couple) and will remain indexed for inflation—eliminating the previously anticipated drop unless future legislation changes it.

  Note: These figures apply to federal estate and gift tax rules. Some states impose their own estate or inheritance taxes with lower thresholds, which should be considered separately in planning.

• Advanced Strategies: Some families “sell” LP units to a trust in exchange for a promissory note. Parents keep a steady income stream while moving growth to the kids.

Think of gifting like watering a tree. Each year you shift a little value, and over time, it grows into something much bigger outside your estate.

Cadence in Action: A 10-Year Example

• Year 1: Parents gift $114K using annual exclusions ($19K each × 3 kids). Thanks to a 30% FLP valuation discount, this moves about $163K of underlying value into trusts.

• Year 5: Repeating ~$163K annually for 5 years = ~$815K transferred. If those assets grow at 6% per year, they’re worth ~$1.1M+ outside the estate by year five. Parents also make a $2M lifetime exemption gift of LP units, further shifting appreciation.

• Year 10: Total annual gifts reach ~$1.63M. With compounding at 6%, that pool alone grows to about $2.2M–$2.4M. Add the $2M lifetime transfer and its growth, and you’re looking at $4.2M–$5.2M outside the estate within ten years.

This is why cadence matters: small, steady gifts combined with growth and a few larger exemption-based transfers can add up to millions sheltered from future estate taxes.

What If Parents Still Need the Money?

This is the #1 question: “If I give most of this away, how do I live on it in retirement?”

Here’s the truth: if you gift 90% of LP units, 90% of distributions legally belong to the kids or their trusts. But there are ways to design the FLP so parents are still financially secure:

1. Keep a Slice — Instead of giving away 90%, maybe keep 30–40%. That way, you still receive a big share of distributions.

2. Charge a Management Fee — As GPs, parents can pay themselves 0.5–1% of assets annually. On $10M, that’s $50K–$100K/year.

3. Gift Slowly — Transfer 20–30% now, more later. Adjust as you see what income you need.

4. Sell to a Trust — Parents can sell LP units to a trust in exchange for a 4–5% note. That creates predictable annual income (say, $250K+), while kids capture future growth.

5. Set a Distribution Policy — The FLP can agree to pay out 3–4% of assets annually, like an endowment. Parents as GPs control the timing.

Example Scenarios

• Scenario A: Parents keep 40%. $10M FLP distributes 4% ($400K). Parents get $160K/year.

• Scenario B: Parents keep 20% + charge 1% GP fee. They receive $180K/year.

• Scenario C: Parents sell $7M LP to a trust with 5% note. That’s $350K/year income plus income on what they kept.

• Scenario D: Parents gift 90%, keep 10% + GP fee. They still receive ~$140K/year.

The design depends on priorities:

• If income is priority #1 → keep more LP units or use a sale-to-trust strategy.

• If estate tax savings is priority #1 → gift more and use GP fees or structured policies for income.

Passing On More Than Money

FLPs don’t just save taxes. They also prepare the next generation.

• Involvement: Kids get reports and attend family “partner meetings.”

• Responsibility: They don’t inherit a lump sum to spend — they inherit a structure to steward.

• Education: Distributions connect investment performance to lifestyle and philanthropy.

• Legacy: Wealth is seen as a family enterprise, not a windfall.

For many families, this cultural transfer is the most valuable part.

FLPs as a “Mini Family Office”

When people hear “family office,” they think billionaires with private staff running investments, taxes, and philanthropy. At its core, a family office is simply a private company set up to manage the finances, investments, and estate planning of one wealthy family — often with teams of accountants, attorneys, and investment managers working exclusively for them.

That level of infrastructure is usually only practical for ultra-wealthy dynasties. But in spirit, a Family Limited Partnership can act as a scaled-down family office for families in the $5M–$25M range.

• Centralized Management: Instead of scattered accounts and properties, the FLP brings everything under one roof.

• Professional Oversight: Parents as GPs can hire advisors, accountants, or managers through the FLP — adding structure and professionalism.

• Generational Training: Kids as LPs learn through financial reports, meetings, and decision-making — essentially a boardroom for the family’s wealth.

• Control + Education: Parents stay in charge, but kids gain practical exposure.

In short, an FLP turns family wealth into an organized enterprise. It may not have the scale of a billionaire’s family office, but it delivers the same core benefits: structure, protection, education, and continuity.

FLPs and Smaller Estates

For families with $1M–$2M in taxable assets, an FLP is usually not the right tool. The costs of setup, ongoing valuations, and legal compliance can easily run into the tens of thousands. At that level, the estate is likely below the federal exemption, so estate tax planning isn’t urgent.

That doesn’t mean planning isn’t important. Families in this range often benefit more from:

• Revocable Living Trusts (RLTs): to avoid probate and keep transitions smooth.

• Retirement Account Planning: Roth conversions, beneficiary designations, and efficient withdrawal strategies.

• Insurance and Protection: Proper liability coverage and umbrella policies.

• Simple Gifting: Annual exclusion gifts can still be powerful at this stage.

For these families, the focus is less on complex structures and more on building wealth steadily and protecting it simply.

If growth continues and the estate climbs toward $3M–$5M+, then the conversation around FLPs, protective trusts, and more advanced estate planning begins to make sense.

How FLPs and Revocable Living Trusts Work Together

It’s important to understand that a Family Limited Partnership doesn’t replace a Revocable Living Trust (RLT) — they serve different purposes and often work best when used together.

• The FLP is primarily about management, control, and estate tax efficiency. It holds taxable assets (like brokerage accounts, real estate, or business interests) and allows parents to shift future growth out of their estate while keeping control.

• The RLT is about probate avoidance and smooth administration. It directs how assets pass when parents die, keeps things private, and avoids the cost and delay of court involvement.

In practice:

• Parents may hold their GP and LP interests inside their RLT, so that if they pass away, their partnership interests move seamlessly without probate.

• The RLT can also act as the “umbrella” document coordinating other trusts (like protective trusts for children) that receive FLP interests over time.

Together, the FLP and RLT create a structure where:

• Day-to-day management and tax planning happen inside the FLP.

• Transition of ownership happens smoothly through the RLT.

This combination gives families both lifetime efficiency and end-of-life simplicity.

What About Retirement Accounts?

FLPs are only for taxable assets — not IRAs or 401(k)s. Moving those in would trigger taxes.

Retirement accounts need their own strategies:

• During Life: Roth conversions can reduce heirs’ future tax bills.

• At Death: Accounts pass by beneficiary designation. Most heirs must withdraw within 10 years under today’s rules.

• Advanced Options: Trusts or charitable strategies can help smooth payouts and protect heirs.

Think of your estate in two buckets:

• Taxable Assets ($5M+): Best for FLPs.

• Retirement Accounts: Use conversions and beneficiary planning.

Risks and Drawbacks

• IRS Scrutiny: Discounts are reviewed closely. The FLP must have a real purpose (management, protection), not just tax savings.

• Costs: Setup and valuations may run $10K–$30K+.

• Formality: The FLP must operate like a business: separate accounts, agreements, records.

• Family Conflict: GPs hold the power. If heirs feel shut out, disputes can happen.

• Qualified appraisal required: Discounts (20–40%) should be supported by a professional valuation and a bona fide, non-tax business purpose.

When FLPs Make Sense

• Families with $5M–$10M+ in taxable assets who expect growth.

• Owners of real estate, concentrated portfolios, or family businesses.

• Parents who want to keep control while planning transfers.

• Families looking to protect heirs from creditors, lawsuits, or divorce.

The Bottom Line

A Family Limited Partnership isn’t just for billionaires. For families starting around $5M in taxable wealth, it can:

• Keep parents in control.

• Lower estate and gift tax exposure.

• Provide income strategies in retirement.

• Protect heirs from outside risks.

• Teach the next generation how to manage capital responsibly.

• Create a “mini family office” to manage and grow wealth like an enterprise.

• Integrate seamlessly with a Revocable Living Trust for smooth estate transition.

Used properly, an FLP can turn a growing estate from a tax problem into a multi-generational wealth engine.

If your family is approaching $5M+ in taxable assets, it may be time to explore whether an FLP belongs in your plan. The earlier you start, the more growth you shift out of your estate.

Important Disclaimer: This article is for educational purposes only and does not constitute legal, tax, or financial advice. Always consult qualified estate planning attorneys and CPAs before acting.