What Is a Family Limited Partnership?

A Family Limited Partnership is a legal entity created under state partnership laws, typically consisting of:

• General Partners (GPs): Usually the senior generation (e.g., parents or founders). They manage the FLP and make investment decisions.
• Limited Partners (LPs): Typically children, grandchildren, or family trusts. They hold economic interests but have no control over management decisions.

The key to the FLP’s effectiveness is how it separates control from ownership. General partners retain management authority over the partnership’s assets — including how concentrated stock is managed, sold, or reinvested — while limited partners gradually receive ownership interests through tax-efficient gifts or sales.

Step 1: Transferring Concentrated Stock Into the FLP

The first step in using an FLP to manage concentrated equity is transferring the stock into the partnership. This often involves:

1. Forming the FLP under state law.
2. Funding the FLP with the concentrated stock (and possibly other assets).
3. Receiving a proportional partnership interest in return.

For example, suppose you own $20 million in company stock representing 80% of your net worth. You and your spouse create an FLP and contribute the shares in exchange for:

• 2% GP interest (retained by you)
• 98% LP interest (which can later be gifted or sold)

From that point forward, the FLP — not you personally — owns the stock. This distinction opens the door to several tax, control, and estate-planning advantages.

Key Advantages of Using an FLP for Concentrated Stock

1. Centralized Control Without Personal Ownership

A central advantage of the FLP structure is the ability to retain full control of the asset even after transferring significant ownership.

As a general partner, you retain the authority to:

• Decide when (and if) to sell the stock.
• Diversify or reinvest proceeds.
• Choose distributions or reinvestment strategies.
• Vote the shares, if applicable.

This is particularly valuable for founders, executives, or board members who must maintain strategic control over shares while pursuing estate-planning goals.

2. Substantial Estate and Gift Tax Discounts

Perhaps the most powerful benefit of an FLP is the valuation discount it can provide for estate and gift tax purposes.

When you gift limited partnership interests to heirs, those interests are often worth less than their pro rata share of the partnership’s underlying assets due to two key discounts:

• Lack of control discount: LPs cannot make management decisions.
• Lack of marketability discount: LP interests are difficult to sell on the open market.

Combined, these discounts can range from 20% to 40% of the interest’s appraised value.

Example:
You transfer $10 million worth of LP interests to your children. With a 30% discount, the taxable value is only $7 million — reducing gift tax exposure and preserving more of your lifetime exemption.

This technique is especially powerful when applied early, while the concentrated stock is still appreciating. All future growth on those transferred interests occurs outside of your estate.

3. Transition Wealth Gradually and Strategically

An FLP enables incremental wealth transfer over time — ideal for families concerned about giving too much too soon or exceeding gift tax exemptions.

• You can gift small LP interests each year within the annual gift tax exclusion ($18,000 per recipient in 2025).
• You can leverage your lifetime gift and estate tax exemption ($13.61 million per person in 2024, scheduled to decrease in 2026).
• You can even sell discounted LP interests to an Intentionally Defective Grantor Trust (IDGT) to remove future appreciation from your estate while maintaining income tax obligations (a powerful “estate freeze” technique).

This flexibility allows you to fine-tune the pace and amount of wealth transferred based on family dynamics, tax law changes, or company performance.

4. Asset Protection from Creditors and Divorce

FLPs also offer a layer of asset protection. Because limited partners have no control over partnership assets, creditors of individual family members generally cannot seize FLP assets directly. Instead, they may receive only a “charging order” — a right to distributions if they are made — which is often of little value.

This can protect concentrated stock (and any future gains) from:

• Lawsuits or creditor claims against individual family members.
• Divorce settlements.
• Business disputes involving younger generations.

5. Coordinated Diversification Without Immediate Tax Consequences

An FLP doesn’t force you to sell concentrated stock immediately. Instead, it allows you to coordinate diversification in a controlled, tax-sensitive manner.

For example, the partnership could:

• Sell shares gradually over time to spread out capital gains.
• Hedge risk using options or structured notes within the FLP.
• Reinvest proceeds into a diversified portfolio, private equity, or real estate.

Because the FLP is a pass-through entity, gains and income flow through to partners in proportion to their ownership — but you maintain control over when those gains are realized.

6. Facilitate Business Succession and Multi-Generational Planning

For founders or executives with significant company equity, FLPs can serve as the foundation for succession planning. Over time, control can transition from senior to junior family members by shifting GP interests while LP interests have already been gifted or sold.

This allows for:

• A smooth transition of decision-making authority.
• Training the next generation in stewardship and investment strategy.
• A structured, tax-efficient vehicle for passing family wealth down multiple generations.

Potential Risks and Considerations

While FLPs offer significant advantages, they are complex legal structures and require careful planning. Key considerations include:

1. IRS Scrutiny

The IRS closely examines FLPs, particularly those formed close to a transferor’s death or those lacking a legitimate business purpose. Improperly structured partnerships can be disregarded for tax purposes, undoing their benefits.

Best Practice:

• Establish the FLP for genuine management, investment, or asset protection purposes — not purely tax avoidance.
• Keep accurate records, hold regular meetings, and follow all partnership formalities.

2. Costs and Complexity

Creating and maintaining an FLP involves legal, valuation, and administrative expenses — often ranging from $15,000 to $50,000 or more. Annual accounting, tax filings, and valuations add ongoing costs.

However, for large concentrated positions, the potential tax savings and wealth transfer benefits usually far outweigh the expenses.

3. Loss of Direct Control Over Gifted Interests

Once LP interests are gifted or sold, they belong to the recipient — even though they have no management authority. Consider using trusts or family governance structures to maintain control and protect against mismanagement.

4. Potential Valuation Disputes

Because valuation discounts are subjective, the IRS may challenge aggressive appraisals. Work with experienced valuation experts and document all assumptions carefully.

Integrating FLPs With Other Advanced Strategies

FLPs are often most effective when used in conjunction with other planning techniques, including:

• Grantor Retained Annuity Trusts (GRATs): Combine FLP discounts with annuity payments to transfer future growth tax-free.
• Charitable Remainder Trusts (CRTs): Contribute FLP interests to a CRT to generate income, reduce estate size, and benefit charity.
• Installment Sales to IDGTs: Sell discounted FLP interests to a trust to freeze estate value and shift future growth out of the estate.

This layered approach can multiply the tax, estate, and asset-protection benefits of the FLP.

Final Thoughts: A Powerful Tool for Concentrated Wealth

A Family Limited Partnership is not a one-size-fits-all solution — but for families holding large concentrated stock positions, it can be one of the most powerful tools available. By separating ownership from control, applying valuation discounts, and enabling gradual, tax-efficient wealth transfer, FLPs transform concentrated equity from a risk into a multi-generational opportunity.

Used properly, an FLP can:

• Reduce estate and gift tax exposure by millions.
• Preserve control over how concentrated stock is managed and diversified.
• Protect assets from creditors, lawsuits, and divorce.
• Facilitate smooth wealth transfer and family governance across generations.

Because FLPs are complex and closely scrutinized, they require collaboration between estate attorneys, tax advisors, and financial planners. But for executives and founders looking to manage concentrated equity intelligently, few tools offer a more powerful combination of control, flexibility, and tax efficiency.