Family Limited Partnership (FLP)
Also: FLP, family limited partnership, family LP
A limited partnership owned by family members, typically used to consolidate family assets under a general partner (often the parent) while transferring limited partnership interests to children at a valuation discount for lack of marketability and lack of control.
A Family Limited Partnership is a state-law partnership typically used to pool family-owned investments or business interests. The parents retain control as general partners with a small percentage ownership, and children or trusts for their benefit hold the bulk of the value as limited partners. Gifts of limited partnership interests receive discounts for lack of marketability (typically 15% to 25%) and lack of control (typically 15% to 25%), compounding to 30% to 40% combined. These discounts allow more economic value to pass under the gift and estate tax exemptions.
Example: a parent contributes $10 million of marketable securities to a FLP and gifts 40% limited partnership interests (worth $4 million without discount) to a trust for her children. With a combined 35% discount, the gift value for tax purposes is $2.6 million, not $4 million. She saves $560,000 of taxable gift exposure, effectively moving more wealth under her exemption.
Common mistake: forming an FLP without meaningful non-tax business purpose. The IRS regularly challenges FLPs as sham entities, and recent Tax Court cases have disallowed the discounts. Document centralized management, investment purpose, and operate the entity professionally.
FLPs matter at high-net-worth family wealth transfer, concentrated investment management, and multi-generational asset protection.