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A Family Limited Partnership (FLP) is a business that is set up and controlled by the members of a family. Like other limited partnerships, an FLP consists of two types of partners: general and limited. General partners control all management and investment decisions and bear 100% of the liability. Limited partners cannot participate in the management of the FLP and have limited liability. The partnership itself isn't taxable – instead, the owners of a partnership report the partnership's income and deductions on their personal tax return, in proportion to their interests.

Generally in an FLP, the senior family members (parents or grandparents) contribute assets in exchange for a small general partner interest and a large limited partner interest. They can then give all or a portion of the limited partner interest to their children and grandchildren. This interest can go to the heirs directly, or be set aside in a trust. This way, through the FLP, parents can begin to shift wealth to their children, introduce them to asset management, educate them about investments and wealth, facilitate and manage pooled resources, and protect some of their assets.

An FLP can be a powerful estate-planning tool as well as an asset protection tool that may:

• Help reduce income, estate and gift taxes
• Allow you to transfer an ownership interest to other family members while letting you keep control of the business
• Help ensure continued family ownership of the business (family succession)
• Provide liability protection for the limited partner(s)
• Provide both protection from creditors and flexibility because it can be amended

FLPs also protect assets from claims of future creditors and spouses of failed marriages. Creditors may not force cash distributions, vote, or own the interest of a limited partner without the consent of the general partners. In the event of a divorce where a limited partner ceases to be a family member, the partnership documents can require a transfer back to the family for fair market value, keeping the asset within the family structure.

There are several other advantages to organizing your business as an FLP:

• Limited partnership interests that are gifted to other family members are generally valued at less than the full fair market value of the underlying assets. That is, reasonable discounts to the value of the limited partnership interests are permitted for lack of marketability and lack of control. This means that by gifting the assets via a limited partnership interest instead of an outright transfer of the business assets themselves, you may be saving gift and estate taxes.
• At death, only the value of your ownership interest in the partnership will be included in your gross estate.
• The use of the partnership entity allows you to shift some of the business income and future appreciation of the business assets to other members of your family.
• You maintain management control of the business while transferring limited ownership of the business to family members.

FLPs have recently become more popular, although they have been a useful estate-planning tool for more than 40 years. The popularity has grown primarily because of a 1993 IRS clarification specifically authorizing the ability to consider gifts of stock to family members eligible for minority discounts. In creating an FLP, family members, (usually parents), put assets into a partnership, and then give a minority interest to other family members while still retaining control of the assets.

If you own a business, speak to an attorney knowledgeable about asset protection and estate law to determine if a Family Limited Partnership would be beneficial to you and your family.