What Is a Family Limited Partnership (FLP)?
A Family Limited Partnership (FLP) is a type of arrangement in which family members pool money to run a
business project. Each family member buys units or shares of the business and can profit in proportion to
the number of shares he or she owns, and as outlined in the partnership operating agreement.
Understanding the Family Limited Partnership (FLP)
Family Limited Partnerships have two types of partners.
usually own the
largest share of the business and they are responsible for day-to-day management tasks such as overseeing
all cash deposits and investment transactions. The general partner may also take a management fee from
profits if outlined in the partnership agreement.
Limited partners have no management responsibilities. They instead buy shares of the business in exchange
for dividends, interest, and profits the FLP may generate.
FLPs vary depending on the nature of the business. For example, suppose an individual wants to start a
luxury apartment venture. He expects the project to cost $1 million, including working capital, and
take in about $200,000 in cash each year before interest on mortgage payments and taxes.
He calculates that he'll need at least a 50% down payment of $500,000. So he calls some family members and
they all agree to establish an FLP that will issue 5,000
shares at $100
each for a total of $500,000. The limited partnership agreement states units can't be sold for at least six
years and the FLP will pay 70% of cash earnings in the form of dividends.
As the general partner, the individual who made the calls buys 500 shares by contributing $50,000 to the
FLP. Family members buy the remaining shares. Now, each family member owns a stake in an FLP starting
with $500,000. The general partner then gets a first mortgage loan for the rest of the $500,000 to start the
$1 million luxury housing project.
The FLP then leases these apartments to tenants and begins taking income from rent. As the mortgage is paid
off, profits and dividends are distributed and each family member grows wealthier.
Estate and Gift Tax Advantages of Family Limited Partnerships
Several families establish FLPs to pass wealth down to generations while securing some tax
protections. Every year, individuals can gift FLP interests tax-free to other individuals up to the annual gift
tax exclusion. For 2021, the gift exclusion was $15,000 for individuals and effectively doubled to $30,000 for married
In addition, these assets effectively leave the couple's estates, as far as the IRS is concerned, so any
future returns would be excluded from
couple's children and grandchildren would benefit from any interest, dividends, or profits generated from
the FLP—thereby preserving wealth for future generations.
As general partners, the couple can set stipulations in the partnership agreement in order to protect these
gifts from being squandered or mismanaged. For example, they can set a rule stating the gifted shares can't
be transferred or sold until the beneficiaries reach a certain age. If any beneficiaries are minors,
the shares can be transferred through a
Unified Transfers to Minors Act (UTMA) account.
Because the structure of FLPs and the tax laws that govern them are complex, families should consult
qualified accountants and tax professionals before establishing an FLP.