family limited partnerships

Family Limited Partnership (FLP).

The purpose of creating such an entity is generally to achieve creditor protection and reduce gift and estate taxes while maintaining control over the management and distribution of the partnership’s assets.

This arrangement establishes two classes of owners. The first are general partners (“GPs”), who are responsible for the management of the FLP and its assets. They are typically the business-owning parents, or a limited liability company owned by these parents to shield them from the unlimited liability of the operational risks of the business.

The second class of owners are limited partners (“LPs”), who have an economic interest in the partnership, yet lack the ability to control, direct or otherwise influence the operation of the FLP. In fact, the LPs typically lack the ability to sell their interest in the FLP, unless it is to an immediate family member. The LPs are typically the children and grandchildren of the business-owning parents, or trusts established for the benefit of these descendants. They have the right to their pro rata share of partnership income and, as the name suggests, are liable only to the extent of their investment in the partnership.

Effectively, the GPs are the operators of the family limited partnership, and the LPs are the passive owners.

Without getting into the legal nuts and bolts of its structure in this brief primer, a properly drafted FLP is a powerful estate planning tool that accomplishes the following goals:

• Enables business owners to transfer ownership from one generation to the next without giving up control of the underlying property.
• Reduces or avoids income and transfer taxes.
• Ensures continuity of family ownership in a business.
• Provides liability protection for the partners.