Family Limited Partnerships Definition

The definition of a family limited partnership is a business partnership where the partners are family members. Family limited partnerships have general partners and limited partners. The general partners manage the business, whereas the limited partners are like investors who have no management authority. 

Family Limited Partnership Examples

A family limited partnership’s business definition includes allowing family members to pool money to start a business. An example would be where one family member wants to start a business, and other family members invest in the business by purchasing shares. 

However, the most common family limited partnerships exist for estate planning purposes. Let’s say parents run a family business with real estate and investment assets. The parents set up a family limited partnership where they are the general partners and transfer all business assets to the partnership. They make their children the limited partners and distribute shares to them. 

The parents can make gift transfers by using the annual gift-tax exclusion. 

All returns on the family business investments stay in the partnership. After the parent dies, their estate only includes the asset’s value when they transfer it to the family limited partnership, regardless of whether it increased in value while in the family partnership. This helps minimize estate tax liability.

Family Limited Partnership Benefits

There are many family limited partnership benefits. One benefit is that they allow for the transfer of business assets to family members with less tax liability. Suppose the general partners transfer shares to their children and grandchildren using the gift tax exclusion. In that case, they can shift the shares in the partnership to their heirs without anyone facing significant tax liability.

Another one of the family limited partnership advantages is that the general partners maintain managerial control of the business regardless of how many shares they hold. The senior family members can run the business until one of their junior members is up for the task. 

Another benefit is that the partners enjoy limited liability. This means that, for the most part, they aren’t personally liable for the business’s debts. For example, if someone sues the business, they can’t go after the limited partner’s personal assets except in limited circumstances. 

Family Limited Partnership Considerations

One of the family limited partnership disadvantages is that the general partners have unlimited liability. This means that a business creditor can go after the general partner’s personal assets.  

Another disadvantage is you can’t gift your personal assets to a family limited partnership while maintaining its structure. Family limited partnerships are for family businesses and business assets. If you’d like to transfer personal assets, you might want to examine another estate planning tool like a trust or will.

Other Names for Family Limited Partnerships

Another name for Family Limited Partnerships is FLPs.

Family Limited Partnership Examples

What are family limited partnerships? Let’s look at an example. Suppose Mom and Dad run a shoe business valued at $100,000. They set up a family limited partnership, making themselves the general partners and their four kids the limited partners. Mom and Dad manage the business, but they transfer shares equal to the gift tax exclusion to their kids every year. The kids enjoy the company’s profits and the business’s increased value. If the parents transfer all the shares by the time they die, the children shouldn’t be liable for estate taxes on the business.

Summary: Family Limited Partnership Definition

A family limited partnership consists of two or more family members. Although it can be used for family members pooling assets to start a family business, it’s most commonly used to transfer a family business to a younger generation while decreasing the tax liability of the transfer.

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