Family Limited Partnership (FLP)
A limited partnership where family members hold the limited interests and a general-partner entity (often a family LLC) runs the show. Used to hold and transfer business interests, marketable securities, and real estate at valuation discounts for lack of marketability and lack of control.
A Family Limited Partnership () is a state-law limited partnership where the general partner (usually a family LLC that the parents control) manages the partnership and the limited partners (usually children or trusts for children) hold ownership interests with no management rights. Parents transfer assets — marketable securities, real estate, business interests — to the FLP and then gift or sell the limited-partnership interests to the next generation.
The tax case: because limited-partnership interests cannot be freely transferred and the limited partners cannot compel distributions or dissolution, those interests trade at a discount to their pro-rata share of underlying net asset value. Typical discounts range 20-40%, documented by a qualified appraiser. That means $1M of FLP limited interests may only use $600K-$800K of gift-tax exemption — a meaningful amplifier when combined with annual exclusion gifts and lifetime exemption use.
Why it still has to be done carefully: the IRS has aggressively challenged FLPs under IRC § 2036 (retained-enjoyment) when parents treated the FLP assets as their own piggy bank (paying personal expenses from the FLP, commingling funds, no real business purpose). Winning FLPs consistently show: (1) a bona fide non-tax purpose (asset consolidation, management training for kids, creditor deterrence); (2) respect for partnership formalities (separate bank account, capital accounts maintained, K-1s issued); (3) parents retaining sufficient non-FLP assets to meet their own needs (no implicit understanding that FLP distributions will fund their lifestyle).
Coordination: FLPs pair naturally with Intentionally-Defective-Grantor-Trusts (IDGTs) and Spousal-Lifetime-Access-Trusts (SLATs) as the asset-holding vehicle whose interests get transferred. They also complement buy-sell agreements for closely-held operating businesses.
Tagged 🔴 — FLPs require formation by an attorney, appraisals by a qualified appraiser (IRC § 2031 and Treas. Reg. § 20.2031-3), annual tax filings (Form 1065), and disciplined adherence to formalities.
State-specific notes
FLP interests are valued using willing-buyer / willing-seller tests under Treas. Reg. § 20.2031-1(b). The IRS has challenged aggressive discounts under §§ 2036 and 2703 — case law (Strangi, Bongard, Bigelow, Wheeler) provides the operational roadmap.
Virginia limited partnerships are governed by Title 50 of the Virginia Code (Revised Uniform Limited Partnership Act). Certificate of limited partnership filed with the Virginia State Corporation Commission; annual registration fee required.
West Virginia limited partnerships are governed by W. Va. Code Chapter 47. Formation and annual filings go through the WV Secretary of State's office.
Alabama FLPs are governed by the Alabama Uniform Limited Partnership Law of 2010 (Ala. Code Title 10A, Chapter 9); FLLCs fall under Alabama's LLC Law at Ala. Code Title 10A, Chapter 5A. Alabama makes charging orders the exclusive creditor remedy against LLC members under Ala. Code § 10A-5A-5.03, which strengthens the FLP/FLLC asset-protection case. Federal valuation-discount rules (IRC § 2704) control the estate-tax planning side.
References
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