Building significant wealth takes time, careful decisions — and often a little luck. Keeping that wealth in the family for generations can be an entirely different challenge. Taxes, lawsuits, divorces and disagreements among heirs can all deplete assets that took decades to accumulate.
For families with substantial investments, real estate holdings or family businesses, a family limited partnership (FLP) may protect those assets while gradually transferring wealth to the next generation. It can also help older family members maintain control over how those assets are managed for the duration of their lives.
How does a family limited partnership work?
An FLP is a legal entity family members can use to retain and manage their assets as a group. It has two types of partners:
- General partners: Typically, these are the parents or grandparents who retain responsibility for managing the partnership and making financial decisions.
- Limited partners: Usually, these are the adult children or other family members who have an ownership interest but little or no role in managing the assets.
For example, parents who own several investment properties might transfer them into an FLP. They can then gradually give partnership interests to their children without immediately giving up control over the properties themselves.
What are the benefits of an FLP?
Depending on the family’s circumstances and how the partnership is structured, an FLP may provide multiple advantages:
- Transferring partnership interests during a parent’s lifetime may remove some assets and their future appreciation from the parent’s taxable estate. Certain transfers may also qualify for discounted valuations, subject to rules made by the IRS.
- Limited partnership interests can also offer some protection against creditors, although that protection isn’t absolute.
- Centralized management can help prevent valuable assets or family businesses from being divided or sold simply because ownership passes to multiple heirs.
- Parents can transfer economic interests in family assets while retaining certain management rights.
- A carefully written partnership agreement can establish how ownership interests are transferred and how future decisions will be made.
An FLP isn’t appropriate for every family. The IRS closely examines partnerships created primarily for tax advantages, particularly when parents continue treating partnership assets as their personal property. Families also need to consider formation costs, annual tax obligations and potential property tax consequences when transferring real estate. Experienced legal guidance can help you determine whether it’s right for your needs.