Family limited partnerships: a plan for the wealth your family shares

A portfolio of rental properties, a family business or substantial investments can provide security for generations. Preserving that wealth requires decisions about management, ownership and succession long before the next transfer occurs.

A Family Limited Partnership, or FLP, can bring those decisions into one coordinated structure. It allows family members to hold economic interests in shared assets while assigning management responsibilities to designated general partners.

For the right family, an FLP can support orderly succession, facilitate gifts and establish clear expectations about how family assets will be managed.

What is a family limited partnership?

An FLP is a limited partnership used to hold and manage family assets. It is not a separate statutory entity reserved exclusively for relatives.

The partnership owns the contributed property. The partners own interests in the partnership.

General partners ordinarily manage its affairs. Limited partners hold economic interests and may have voting and approval rights under the agreement and applicable law. Their role does not have to be entirely passive. California law generally protects limited partners from partnership obligations, subject to exceptions. California Corporations Code § 15903.03.

A carefully structured LLC may serve as general partner. That choice deserves attention: an individual serving as general partner ordinarily has personal liability for partnership obligations. California Corporations Code § 15904.04.

Transfer ownership through a deliberate succession plan

Parents who own investment properties may want to begin transferring wealth to their children while maintaining continuity in management.

An FLP can allow them to transfer limited partnership interests over time rather than deed fractional interests in each property directly to each child. The partnership agreement establishes management authority, distribution rules and procedures for future ownership changes.

The distinction is useful. Children can acquire an economic stake while management remains with designated general partners, subject to their legal duties and the agreement.

Any retained authority must be evaluated alongside the tax objectives. Excessive retained rights or continued personal enjoyment of transferred property can cause assets to remain includible in the donor’s taxable estate. IRS guidance on retained interests.

Who should consider an FLP?

• Families with several investment properties. Parents want consistent management, coordinated reinvestment and a gradual transition of ownership to children.
• Owners of a family enterprise. The family wants to distinguish responsibility for management from the right to share in economic returns.
• Parents preparing substantial lifetime gifts. They want to transfer interests through a documented program that addresses valuation, tax reporting and the recipients’ circumstances.
• Families concerned about fragmented ownership. An agreement can establish procedures for transfers, buyouts and succession before several generations hold interests.
• Families whose estates may face federal estate tax. Properly structured transfers may move future appreciation to the next generation, with potential valuation benefits where supported.

An FLP is most useful when the family has genuine management or succession objectives and is prepared to administer the arrangement accordingly.

Valuation discounts may support the gifting strategy

A limited partnership interest may have a fair market value below its proportionate share of the partnership’s net asset value. Lack of control and limited marketability can affect what a buyer would pay.

For example, a 10% limited partnership interest in a partnership with $5 million of net assets is not necessarily worth exactly $500,000. Its value depends on the assets, economic rights, transfer restrictions and other relevant facts.

A discount is not automatic, and there is no standard percentage every family may claim. A defensible valuation and appropriate reporting are essential. The IRS requires an explanation of claimed valuation discounts on reportable gifts. IRS gift tax instructions.

Gifts of partnership interests also do not automatically qualify for the annual gift tax exclusion. The recipient must receive a qualifying present interest; restrictions affecting immediate enjoyment require analysis.

The partnership agreement deserves careful drafting

A formation filing cannot answer the questions that arise when relatives share substantial wealth.

The agreement should address who manages, which decisions require approval, how reserves and distributions are determined, and what happens when someone wants to withdraw. It should also anticipate death, incapacity, disagreement and proposed transfers to outsiders.

Consider three siblings who will eventually inherit partnership interests. One expects regular income, another favors reinvestment and the third wants a buyout. A thoughtfully prepared agreement can establish procedures for addressing those competing interests before they become a dispute.

The family must then operate consistently with that agreement. The IRS examines whether family entities were properly formed and funded and whether retained benefits undermine the claimed estate planning treatment. IRS guidance on family limited liability entities.

Creditor protection has defined limits

Partnership property is distinct from a partner’s individual interest. California generally directs a partner’s judgment creditor toward a charging order against the partner’s transferable interest rather than possession of partnership property.

That protection is meaningful, but it is not absolute. California permits foreclosure of the charged interest, with the purchaser receiving transferee rights. Claims against the partnership itself can reach partnership assets. California Corporations Code § 15907.03.

An FLP therefore belongs within a broader plan that considers insurance, property ownership and the family’s actual exposures.

Understand the costs and tax consequences

An FLP does not create a blanket exemption from income, gift or estate taxes.

Partnership income generally passes through to the partners, who may owe tax even when cash is retained. Distributions have separate tax rules and can produce taxable gain in some circumstances. IRS partnership tax guidance.

California limited partnerships generally pay an $800 annual tax and have ongoing filing obligations. A separate general partner entity may create additional costs. California Franchise Tax Board.

Before funding the partnership, the review should also address financing, property tax reassessment, income tax basis and the consequences of future gifts. An FLP should be compared with a family LLC and other available structures.

Establish the plan before transferring the wealth

The best time to consider an FLP is while ownership, management and succession decisions remain open.

At American Trust Institute, we help California families evaluate how family entities, trusts and lifetime transfers can work together. The process begins with what your family owns, who should manage it and how you want the next generation to participate.

If your family holds substantial real estate, business interests or investments, a review can determine whether an FLP provides an appropriate foundation for the years ahead.

Attorney Cynthia Lee personally designs and reviews every plan. Consultations are available in English, Cantonese or Mandarin, by Zoom or at our San Jose and San Francisco offices. Request an appointment to discuss family limited partnership planning.