Why It Matters

For high-net-worth families, transferring wealth efficiently while maintaining control over assets can be a key estate planning objective. FLPs provide a structured way to pass ownership interests to heirs while potentially reducing the taxable value of those transfers through valuation discounts. When implemented correctly, this strategy can help preserve family wealth, support long-term succession planning, and minimize tax liabilities, making it an important consideration in comprehensive estate planning.

What is a family limited partnership?

An FLP is a limited partnership (offers some members limited liability for business debts) controlled by members of a family. 

An FLP consists of two types of partners:

1. General- Directs and oversees all management and investment decisions and bears 100% of the liability.
2. Limited- Are not permitted to participate in the FLP’s management; have limited liability.

Key aspects of FLPs

• FLPs are not taxable; rather the owners of the FLP report its income and deductions on their personal tax return, in proportion to their interests.
• FLPs are generally contributed to primarily by the senior family members (parents/grandparents). In exchange for their asset contributions, these family members typically receive a small general partner interest and a large limited partner interest.
• FLPs allow senior family members to give some or all of the limited partner interest to their heirs (children, grandchildren, etc.) This can be set aside in a trust, too.

How do valuations factor in?

One of the major benefits of FLPs is the ability to apply valuation discounts when transferring those ownership interests. Because limited partners have no control over the partnership and their interests are difficult to sell, the value of those interests is often reduced for tax purposes.

Two common valuation discounts include:

• Lack of control discount: Typically ranges from 15% to 40%, reflecting the limited partner’s inability to influence partnership decisions.
• Lack of marketability discount: Often ranges from 10% to 30%, reflecting the difficulty of selling or transferring the partnership interest.

These discounts can significantly reduce the taxable value of gifts or estate transfers. For example, a 10% ownership stake in a partnership worth $1 million might normally be valued at $100,000. After applying valuation discounts, however, the taxable value could drop to approximately $70,000, lowering potential gift or estate tax exposure.

Planning considerations and IRS scrutiny

While valuation discounts can offer meaningful tax advantages, FLPs must be structured and operated carefully. The IRS closely reviews these arrangements to ensure they serve legitimate estate or business planning purposes rather than existing solely to reduce taxes.

To withstand scrutiny, families should:

• Establish a clear non-tax purpose for the FLP, such as centralized asset management or succession planning.
• Maintain proper documentation and partnership formalities, including partnership agreements, records, and meetings.
• Obtain independent professional valuations to support any discounts applied to partnership interests.

Failure to follow these best practices may result in the IRS challenging the valuation discounts or the structure of the partnership itself.

Family Limited Partnerships can be a powerful estate planning tool for families seeking to preserve wealth, maintain control over shared assets, and transfer ownership to the next generation in a tax-efficient manner. When combined with well-supported valuation discounts, FLPs can help reduce the taxable value of transferred interests and facilitate long-term wealth planning.

However, careful planning, documentation, and professional guidance are essential to ensure the strategy achieves its intended benefits while complying with IRS rules and valuation standards.