A Family Limited Partnership (FLP) is a legal partnership among family members. FLPs provide an excellent vehicle to centralize the management of assets, protect against creditors, reduce administration expenses of investment and expose younger family members to the investment and management of assets.

Mechanics of an FLP

An FLP has a general partner, typically a parent, who controls the management of the partnership and is liable for all partnership debts. The general partner may be a corporation or limited liability company owned by the parent and therefore shields the general partner from unlimited liability. The limited partners, typically children, have no control over management of the partnership assets, receive their pro-rata share of partnership income and are liable only to the extent of their investment in the partnership.

Valuation Discounts

Because the limited partnership interest carries no ability to control, the value of the interest is not equal to the value of the underlying assets. The theory is that if someone offered you a $10,000 piece of property, but you had no control over its use, you would not pay $10,000 for it. This is referred to as a minority interest discount. Likewise, the ownership and transfer of partnership interests may have restrictions attached. This is referred to as marketability discount and also may cause the value of the partnership interest to be less than the underlying value. Valuation discounts are very useful for wealthy taxpayers because they provide gift tax leverage; that is, more assets may be gifted under the annual exclusion or exemption equivalent than otherwise would be possible.


Parent forms an FLP and transfers assets to it. Parent’s wholly owned limited liability company is the general partner and Parent is the sole limited partner. The following year Parent decides to give annual exclusion gifts of limited partnership interests to his children. The FLP is appraised and the appraiser informs Parent that the value of a limited partnership interest should be discounted by 35% due to lack of control and marketability. Accordingly, Parent may gift limited partnership worth $66,000 to his children that, due to the family context, may be worth $88,000 to them.


Ever since IRS ruled that minority and marketability interests might be appropriate in the family context FLPs have been touted as vehicles to transfer wealth to younger generations at substantially reduced federal gift and estate tax costs. Over the last decade, IRS presented largely unsuccessful challenges, based on sham, step transaction theories, the disregard of the entity itself or the restrictions in the agreement, to disallow the discounts taxpayers were taking on gift and estate tax returns. Beginning in the late 1990s, however, IRS has succeeded in including underlying assets in the taxpayer’s estate under Section 2036(a) of the Code based on an implied retention of the right to enjoy the income. How the IRS prevails on this issue may depend on what circuit court is considering it. The bottom line is that FLPs are intensely factual cases. FLPs that hold assets for a real business purpose and with respect to which the formalities (formation and administration) are followed have a much better chance at success. FLPs are complex financial tools that when designed too aggressively may attract the attention of the IRS. Clients considering a FLP must do so with extreme caution and with the consult of qualified legal counsel.