Many families want to pass wealth to the next generation without seeing more of it lost to taxes than necessary. A family limited partnership (FLP) can help reduce your taxable estate by allowing you to transfer ownership interests in certain assets while retaining a level of control over how those assets are managed. When used as part of a broader estate plan, an FLP may also help preserve family wealth and simplify the transition of valuable assets over time.
What Is a Family Limited Partnership?
A family limited partnership is a legal entity that allows family members to jointly own and manage assets such as real estate, investment portfolios, or closely held business interests.
An FLP generally has two types of partners:
- General partners, who manage the partnership and make day-to-day decisions
- Limited partners, who own an interest in the partnership but do not participate in management
Many families choose to have parents serve as general partners while gradually transferring limited partnership interests to children or grandchildren.
How Does a Family Limited Partnership Reduce Estate Taxes?
One of the primary benefits of an FLP is that it can lower the value of assets included in your taxable estate over time.
Instead of giving away individual assets, you transfer ownership interests in the partnership. As you make gifts of limited partnership interests, those interests are removed from your estate, assuming the transfers qualify under federal tax rules.
If the transferred interests appreciate in value after the gift, that future growth generally occurs outside of your taxable estate, which may reduce estate tax exposure.
Why Are Partnership Interests Sometimes Valued at a Discount?
Family limited partnerships may also provide valuation discounts under certain circumstances.
Limited partnership interests often have less market value than a proportional share of the partnership’s underlying assets because they typically:
- Cannot easily be sold
- Do not control management decisions
- Have restrictions under the partnership agreement
Qualified appraisers may apply discounts for lack of marketability or lack of control when valuing these interests for gift and estate tax purposes. A lower valuation can allow you to transfer a greater percentage of the partnership while using less of your available gift and estate tax exemption.
Because the IRS closely reviews valuation discounts, the partnership must be properly formed and operated as a legitimate entity, not simply created to obtain tax advantages.
What Assets Can Be Placed in a Family Limited Partnership?
An FLP is generally most appropriate for assets that are expected to remain within the family over the long term.
Examples may include:
- Income-producing real estate
- Family businesses
- Investment accounts
- Farms or agricultural property
- Mineral or timber interests
Assets that you expect to sell soon or use for everyday personal expenses are often better suited for other planning strategies.
Is a Family Limited Partnership Right for Every Estate?
While FLPs can offer meaningful tax and asset management benefits, they are not the right choice for every family.
A family limited partnership requires ongoing administration, including maintaining partnership records, filing tax returns, and operating the entity for a legitimate business or family purpose, not simply to reduce taxes.
Another important consideration is Internal Revenue Code Section 2036. If the IRS or a court determines that you continued treating partnership assets as your own after transferring them, the full value of those assets may be included back in your taxable estate, eliminating much of the intended tax benefit. This can occur if partnership formalities are ignored, personal and partnership assets are mixed, or the partnership exists primarily for tax planning.
For many Wisconsin families, a revocable living trust, gifting strategy, or other estate planning tools may accomplish similar goals with less complexity. The right approach depends on your estate, the assets you own, and your long-term goals.
How Does a Family Limited Partnership Fit Into an Estate Plan?
A family limited partnership is usually one component of a broader estate plan rather than a stand-alone solution.
Depending on your circumstances, it may work alongside documents and strategies such as:
- Revocable living trusts
- Irrevocable trusts
- Annual gifting strategies
- Powers of attorney
- Business succession planning
Combining these tools can help create a coordinated plan that reflects your family’s financial and personal goals while addressing potential tax concerns.
Build a Long-Term Plan for Future Generations
A family limited partnership can be an effective way to transfer wealth, preserve family assets, and potentially reduce estate taxes when it is structured and maintained properly. Every family’s financial picture is different, which is why careful planning matters before creating one.
At Borakove Osman LLC, we help Wisconsin individuals and families evaluate whether a family limited partnership fits within their broader estate planning goals. If you’re considering ways to reduce future estate taxes while protecting assets for the next generation, contact us today to schedule a consultation. We’ll help you evaluate your options and create an estate plan that reflects your family’s long-term goals.
