How To Use a Family Limited Partnership In Estate Planning

2 October 2025

Estate planning might not seem like the most exciting topic, but trust me, it's crucial—especially if you want to protect your family's financial future. One powerful tool that often flies under the radar is the Family Limited Partnership (FLP). If you’ve never heard of it, don’t worry! By the time you finish this article, you’ll not only know what an FLP is but also how to use it in your estate planning to maximize wealth transfer and minimize taxes.

So, grab a cup of coffee (or a glass of wine—no judgment here), and let’s break it down in a way that actually makes sense.

📌 What Is a Family Limited Partnership (FLP)?

Before we dive into the nuts and bolts of how to use it, let's clarify what a Family Limited Partnership actually is. It’s basically a business structure that allows family members to pool their assets into a single partnership while maintaining specific rights and control over them.

Think of it like a family business—but instead of selling products or services, you’re managing investments, real estate, or other assets.

An FLP is made up of two types of partners:

1. General Partners (GPs) – These folks (usually the parents) control the partnership, make investment decisions, and handle daily management.
2. Limited Partners (LPs) – Typically the children or other heirs, who own a share of the assets but don’t have management rights.

Why is this structure so powerful? Because it allows parents to gift ownership of assets to their children while still maintaining control over them.

✨ Benefits of Using a Family Limited Partnership in Estate Planning

Now that we understand the basics, let's get into the good stuff—why you should care about FLPs when planning your estate.

1. Significant Tax Savings

Let’s be honest—the IRS takes a big bite out of everything. But with an FLP, you can legally shrink that bite when transferring wealth.

Here’s how:

- When you transfer ownership to your heirs via the FLP, the value of their shares is often discounted (because they lack control and marketability).
- That means less estate and gift tax liability—hooray for loopholes!
- Plus, you can gift up to the annual IRS limit ($18,000 per person in 2024) without triggering gift taxes.

Essentially, an FLP allows you to move assets out of your estate without handing over complete control (yet keeping Uncle Sam at bay).

2. Asset Protection from Creditors

Worried about lawsuits or creditors eyeing your assets? An FLP provides a level of protection because:

- Limited partners don’t have direct control over FLP assets.
- If a creditor wants to go after a limited partner’s interest, they often can’t force a sale or take control.

In other words, an FLP acts like a financial fortress, shielding your wealth from outside threats.

3. Maintains Family Wealth for Future Generations

Ever heard of "Shirtsleeves to shirtsleeves in three generations"? Sadly, many family fortunes disappear because future generations mismanage wealth.

An FLP can help prevent this by:

- Keeping assets within the family (rather than being divided up and spent).
- Encouraging responsible financial management by limiting access to heirs.
- Allowing parents to guide financial decisions while gradually passing control.

It's like setting up a training program for wealth management, ensuring your heirs don’t blow the family fortune on Ferraris and five-star vacations.

🔄 How to Set Up a Family Limited Partnership

Okay, now that you’re sold on the idea, let’s go over the basic steps to setting up an FLP.

Step 1: Establish the FLP Structure

- Work with an estate planning attorney to draft a partnership agreement.
- Decide who will be the general partner(s) and limited partner(s).
- Register the FLP in your state (each state has slightly different rules).

Step 2: Transfer Assets Into the FLP

- Common assets include real estate, stocks, bonds, business interests, or cash investments.
- You, as the general partner, retain control over how these assets are managed.

Step 3: Gift Limited Partnership Shares

- Over time, transfer limited partnership interests to your heirs.
- Use your annual gift tax exclusion to avoid unnecessary taxation.

Step 4: Manage and Maintain the FLP

- Follow all legal and tax requirements to avoid IRS scrutiny.
- Keep proper records of meetings, transactions, and distributions.

It’s not as complicated as it sounds, especially if you work with a good estate planning attorney. Once the FLP is set up, it essentially runs itself—with you still steering the ship.

❌ Potential Pitfalls to Avoid

While FLPs are fantastic for estate planning, they’re not foolproof. Here are some common mistakes to steer clear of:

- Retaining too much ownership – If the IRS thinks you kept too much control, they might disqualify your tax benefits.
- Not respecting corporate formalities – If you treat the FLP like a personal bank account, courts may not uphold it in legal disputes.
- Improper valuation of assets – Always get a proper valuation to ensure IRS compliance.
- Waiting too long to start – The earlier you set it up, the more you can leverage the tax benefits.

So, while FLPs are powerful, they require proper planning and execution. But hey, that’s what lawyers and accountants are for!

🎯 Is an FLP Right for You?

Let’s be real—FLPs aren’t for everyone. If your estate is relatively small, you might not need one. However, if you:

✅ Have significant assets (real estate, business interests, etc.)
✅ Want to protect your wealth from creditors and lawsuits
✅ Plan to pass substantial wealth to your children or grandchildren
✅ Want to minimize estate and gift taxes while keeping control

Then an FLP might be the golden ticket to smooth estate planning.

If that sounds like you, talk to an estate planning attorney. They can help you crunch the numbers and see if an FLP aligns with your financial goals.

🏁 Final Thoughts

Estate planning isn’t just about having a will—it’s about setting up the right financial structures to ensure your wealth is preserved, protected, and passed on efficiently.

A Family Limited Partnership (FLP) is one of the best tools for high-net-worth individuals who want to transfer wealth while avoiding unnecessary taxes and legal complications.

While setting one up might seem like a hassle, the benefits are well worth it. Less money lost to taxes, more control over your assets, and a structured plan for your heirs? That’s what we call a financial win-win.

So, if you're serious about estate planning, it might be time to consider an FLP—because your future heirs will definitely thank you.