Family Limited Partnerships

Questions and Answers - Q&As

• What is a Family Limited Partnership ("FLP")?
• Who controls the management of the FLP?
• What are the potential tax savings available under the FLP?
• How are limited units valued for gift and estate tax purposes?
• What are the non-tax advantages can result from an FLP?
• What asset protection benefits can result from an FLP?
• How is the formation of the FLP treated for income tax purposes?

A Family Limited Partnership ("FLP") is a partnership that can achieve certain tax savings, asset protection and other purposes. In substance, an FLP is similar to a family investment club. In a technical sense, an FLP is similar to a closed end mutual fund which is scheduled to continue for an extended period.
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The ownership rights in the FLP are divided into general units and limited units. The holders of the general units have the sole right to manage the affairs of the FLP, such as investment decisions, distributions to partners, approval of any requested sales or liquidations of units. The holders of the limited units are essentially restricted, or limited, to receiving their proportionate share of any distributions from the FLP.
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The potential tax savings available with the FLP result from the valuation discounts that result from the restrictions and limitations associated with the limited units.
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The valuation of limited FLP units usually involves the computation of several discounts from the face value of the underlying assets. These discounts include: (i) investment company discount which is usually dependent on the speculative nature of the assets in the FLP and the professional management of the asset portfolio, (ii) discount for lack of marketability, (iii) discount for lack of control, (iv) discount for low basis of securities with the uncertainty of the availability of a Section 754 step up in basis.
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The non-tax advantages of an FLP can include: (i) consolidation and economical management and investment of assets, (ii) facilitation of gifting and (iii) if desired, providing a vehicle to make charitable contributions on behalf of family.
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Creditors of a partner can only obtain a charging order entitling the creditor to a share of partnership distributions. The creditors cannot become partners and cannot participate in the management of the FLP.
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The contribution of assets to the FLP, if properly structured, is a tax free transfer that does not cause the recognition of any capital gain by any of the partners. However, extreme care must be taken when marketable securities are contributed to the FLP to avoid the required recognition of capital gain under the "anti-diversification" rules.
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