A family limited partnership (usually just called an FLP) is a business entity tuned specifically for estate planning. An FLP is a limited partnership controlled by members of the family.
In a limited partnership (including FLPs) there are two types of partners (or owners): general partners and limited partners.
- General partners control the business and are personally liable for business debts.
- Limited partners are passive investors. They can receive profits from the business. But they have no say in management and are not liable for business debts.
When used as an FLP, the general partner typically has a very small interest (such as 1%) and the limited partner a much larger interest (99%). This structure creates several planning opportunities.
Wealth Transfer
Transferring FLP interests can be part of a plan to reduce estate tax liability. Limited partner interests can be gifted or sold, removing them from a parent’s estate for federal estate tax purposes. In this way, parents can retain control (via the general partner interest) while effectively transferring the value of the underlying FLP assets.
Asset Protection
An FLP can be used for asset protection. A creditor that can reach the limited partner interests is left with few options because the limited partner has no control. The Achilles heel, of course, is the partner with control—the general partner. By using a domestic asset protection trust or other structure as a general partner, that avenue for creditors can be cut off as well.
