A family limited partnership (FLP) is a business structure and an estate planning tool. It allows family members to benefit from the profits of the business whether they’re actively part of it or not.
An FLP, which needs to include at least two people, is typically made up of general partners (GPs) and limited partners (LPs). GPs, often parents or other senior members of the family, own the majority of the business, make the decisions and manage the daily operations. The LPs can buy or be gifted shares of the business so that they benefit from the money it makes, but they typically have little or no role in business decisions.
FLPs can be a succession planning and wealth transfer tool
The GPs may help some of their adult children, who are LPs, learn the ropes of the business so that eventually some of them can become GPs themselves. However, others who choose not to be involved in the business can still benefit from it by continuing as LPs. That’s why FLPs are a popular succession planning tool in addition to a tool for protecting and handing down generational wealth.
An FLP helps families transfer wealth, including property, at a discounted amount and avoid transfer taxes. This can help them stay under the tax exemption limit. In 2022, that federal tax exemption limit is $12.06 million.
An FLP can be set up around an existing family business or a new one. Sometimes, when a family builds wealth from real estate investments, they’ll set up an FLP around that.
We’ve just scratched the surface here in discussing FLPs. These partnerships can be complex to establish. You definitely should seek tax and financial advice as well as experienced legal guidance when determining whether a family limited partnership is the right choice for your family and how it will fit in with the rest of your estate plan.