Family Limited Partnerships: A Smart Tool for Families with Wealth | Allworth Financial

If you’ve built significant wealth, chances are you’ve thought about how best to protect it, pass it down, and minimize the tax bite along the way. That’s where a Family Limited Partnership (often called an “FLP”) can come into play. While the name might sound like something you’d only hear in a law school lecture, in reality, an FLP is a practical estate and wealth planning tool that families use every day to manage assets, reduce estate taxes, and encourage stewardship of wealth across generations.

Let’s break it down into what an FLP is, why families use them, how they work in practice, and how you might know if one makes sense for you.

What Exactly Is a Family Limited Partnership?

At its core, a Family Limited Partnership is a legal entity set up under state law that allows family members to pool assets together in one structure. Think of it as a family-owned “company” that holds investments.

There are typically two types of partners:

• General Partners (GPs): Usually the parents or wealth creators. They retain management control and decide how the partnership is run.
• Limited Partners (LPs): Often children or other family members. They own shares in the FLP but don’t have day-to-day control.

The assets inside the FLP can include things like investment accounts, real estate, or even a family business. By placing them under one roof, the family can manage wealth more efficiently while also creating opportunities for tax planning and legacy building.

Why Families Use FLPs

1. Estate and Gift Tax Benefits

An FLP allows you to gradually transfer wealth to children or grandchildren while potentially applying valuation discounts. Because limited partners don’t have control, their shares are often considered less valuable from a tax perspective. That means you may be able to transfer more wealth while using less of your lifetime gift and estate tax exemption.

2. Asset Protection

Assets held inside an FLP are generally harder for creditors to reach. If a family member is sued or goes through a divorce, their partnership interest is typically less accessible to outside claimants.

3. Control While Gifting

Perhaps one of the biggest draws: parents can give away economic ownership (shares in the FLP) but keep the decision-making power through their role as General Partners. You can begin moving wealth down to the next generation without giving up the steering wheel.

4. Family Engagement

FLPs also create a framework for family members to learn about managing wealth. By holding family meetings, sharing investment updates, and involving children in decisions (appropriate to their roles), you can foster a sense of shared responsibility.

How to Use an FLP in Practice

The process of setting up and using an FLP is structured but flexible. Here’s how it typically unfolds:

1. Formation
   An attorney drafts the partnership agreement and files it with the state. This document spells out the rights, responsibilities, and ownership structure.
2. Funding the FLP
   You transfer assets into the partnership. These might include brokerage accounts, rental properties, or business interests. Once transferred, they’re legally owned by the FLP, not by you personally.
3. Issuing Interests
   General Partner and Limited Partner interests are issued. You (as the parents, most often) might hold 1% as GPs and 99% as LPs. You then gradually gift or sell LP shares to your children or trusts for their benefit.
4. Management
   As GPs, you maintain control, making investment decisions, declaring distributions, and keeping records. Limited Partners benefit from income or eventual appreciation but have limited say.
5. Succession
   Over time, you can transition more economic ownership to heirs while still guiding the ship. Eventually, the next generation may take over GP roles.

How Do You Know if You Need One?

Not every family needs an FLP. For some, simpler strategies (like outright gifts or trusts) are more cost-effective. Here are some signs that an FLP might fit:

• You have significant taxable estate concerns. If your net worth is high enough that estate taxes could be an issue (over $15 million for an individual, $30 million for a couple), FLPs can help maximize tax efficiency.
• You own complex or illiquid assets. Real estate holdings, family businesses, or concentrated investment portfolios can be better managed under one entity.
• You want to retain control while transferring wealth. If you’re not ready to hand over the keys entirely, an FLP provides a nice middle ground.
• You want to involve your family in financial stewardship. FLPs encourage collaboration and education, which can help prepare heirs for future responsibilities.
• You value asset protection. If liability risks are on your radar, whether from business, professional, or personal circumstances, an FLP adds another layer of protection.

What to Watch Out For

FLPs are powerful tools, but they’re not without complexity or cost. Some important caveats:

• The IRS pays close attention to FLPs. Proper structuring and administration are critical. That means keeping records, avoiding commingling of personal and partnership funds, and making sure the partnership has a legitimate business purpose.
• Setting one up involves legal and tax fees, and you’ll need to maintain formalities like annual meetings and detailed accounting.
• An FLP is part of an overall plan, not the entire plan. Trusts, insurance, and other vehicles often work alongside it.

The Bottom Line

A Family Limited Partnership is like the Swiss Army knife of estate planning: versatile, powerful, and best used in the right hands. For families with meaningful wealth, it offers the ability to transfer assets efficiently, keep control, protect what you’ve built, and engage your heirs in responsible stewardship.

That said, it’s not a do-it-yourself project. These partnerships need careful design and ongoing maintenance to deliver the intended benefits.

At Allworth Financial, we help families evaluate whether an FLP makes sense within the broader context of their financial and estate plan. If it’s the right fit, we collaborate with trusted attorneys and tax professionals to implement and administer the partnership smoothly.

If you’re curious about whether an FLP might be right for you, a conversation with your advisor is the best next step. The earlier you explore your options, the more flexibility you’ll have to create a plan that’s tax-efficient, protective, and aligned with your family’s goals.

This information is meant for educational purposes and not as direct tax or legal advice. Rules and regulations can shift anytime, so it’s always best to consult a qualified tax advisor, CPA, or attorney for guidance tailored to your specific situation.