Transferring wealth from one generation to the next is a good thing. Especially now, when a significant change is coming to the federal estate tax exemption amount, says a recent article titled “The Pros and Cons of Family Limited Partnerships” from The Wall Street Journal. The FLP needs to be drafted with an experienced estate planning attorney, working in consultation with a CPA and financial advisor. This is not a Do-It-Yourself project.
In 2023, estates valued at up to $12.92 million were exempt from federal taxes. However, on January 1, 2026, the exemption sinks to around $6 million, with adjustments for inflation. As a result, wealthy Americans are now re-evaluating their estate plans, and many are turning to the Family Limited Partnership, or FLP, as a tax-saving strategy.
An experienced estate planning attorney can tailor an FLP to suit every family’s needs. You don’t have to be ultra-wealthy for an FLP to make sense. An upper-middle-class family owning a small business or real estate properties they’re not ready to sell could use an FLP, and a real estate mogul owns properties in multiple states.
There are some caveats. Setting up an FLP ranges from $8,000 to $15,000. However, it can go higher depending on the state of residence and the complexity of the partnership. There are annual operating costs, tax filings, and appraisal fees. The IRS isn’t always fond of FLPs, because there is an institutional belief that FLPs are subject to abuse.
There are two kinds of partners: general and limited. What differentiates these partnerships from traditional limited partnerships is that all partners are family members. The parents or grandparents are usually the general partners. They contribute most assets, typically a small business, stock portfolio, or real estate. In contrast, children are limited partners with interests in the partnership.
The general partners control all of the investment and management decisions and bear the partnership liability, even though their ownership of assets can be as little as 1% or 2%. They make the day-to-day business decisions, including funds allocation and income distribution. The ability of the general partner to maintain control of the transferred assets is one of the FLP’s most significant advantages. The FLP reduces the taxable estate while maintaining control of the assets.
Once you create the entity, you transfer assets to the Family Limited Partnership immediately or over time, depending on the family’s plan. The goal is to get as much of the property out of the general partners’ taxable estate as possible. Assets in the FLP are divided and gifted to limited partners, although this is often a gift to a trust for the limited partners, who are the general partners’ descendants. Placing the assets in a trust adds another layer of protection since the gift also remains outside of the limited partner’s taxable estate.
To avoid a challenge by the IRS, the family must conduct the partnership as a business entity. Meetings need to be scheduled regularly, with formal meeting minutes appropriately recorded. The partnership should compensate general partners for their services, and limited partners must pay taxes on their share of income from the partnership. The involvement of professionals in the FLP is needed to be sure the FLP remains compliant with IRS rules.
An alternative is to create a Family Limited Liability Company instead of a Family Limited Partnership. An experienced estate planning attorney can organize the FLLC to operate like an FLP while protecting partners from liability.
Partnerships are not for everyone. Your estate planning attorney will advise whether an FLP or an FLLC makes more sense for your family.
Reference: The Wall Street Journal (December 3, 2022) “The Pros and Cons of Family Limited Partnerships”
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