What Is a Family Limited Partnership (FLP)?
Let me explain what a family limited partnership, or FLP, really is. It's an arrangement where family members pool their money to run a business venture, and each one buys units or shares in it.
Profits get shared based on how many shares each member owns, all detailed in the partnership operating agreement. General partners in an FLP have unlimited liability for the business operations, while limited partners have limited liability.
Key Takeaways on FLPs
An FLP functions as a business or holding company owned by two or more family members. Each can contribute money for shares and potential profits.
You'll find two types of partners: general partners who manage the business, and limited partners. FLPs are commonly set up to preserve generational wealth through tax-free asset transfers like real estate. But if the business fails, you risk losing your investment or even facing debt.
Understanding an FLP
FLPs have general partners who typically own the largest share and handle day-to-day management, like cash deposits and investments. They might take a management fee from profits if the agreement allows it.
Limited partners don't manage or decide on investments; they just buy shares for dividends, interest, and profits.
Setting Up an FLP
Setting up an FLP depends on the business type. Take a luxury apartment venture that costs $1 million and expects $200,000 yearly cash before interest and taxes. You'd need a 50% down payment of $500,000, so family members form an FLP issuing 5,000 shares at $100 each.
The agreement might say shares can't be sold for six years and 70% of earnings go as dividends. The general partner buys 500 shares with $50,000, family buys the rest, and the FLP uses the funds for a mortgage to build and lease apartments, distributing profits as the mortgage pays off.
Advantages of FLPs
FLPs offer estate and gift tax advantages to build generational wealth. You can gift FLP interests tax-free up to the annual exclusion—$19,000 for individuals in 2025, $38,000 for couples.
For example, a couple with $5 million transfers it to an FLP and gifts $456,000 yearly to 12 descendants without taxes. Assets in the FLP leave your estate, exempting future returns from estate taxes, and you can add stipulations like age restrictions on transfers or use UTMA for minors.
Important Considerations
Because FLPs and their tax rules are complex, you should consult qualified accountants and tax professionals before starting one.
Disadvantages of FLPs
Creating an FLP can be expensive due to its complexity, often needing tax specialists, estate attorneys, and other professionals. It operates as a business, exposing partners to liabilities if mismanaged.
Other issues include capital gains taxes and difficulties transferring interests if general partners have too much control.
Pros and Cons of FLPs
- Pros: FLP interests can be gifted tax-free up to the annual exclusion; returns are exempt from estate taxes; it builds and protects generational wealth.
- Cons: Setup and maintenance can be expensive; too much general partner authority can compromise tax benefits; members could face liabilities from mismanagement.
Frequently Asked Questions
What are family limited partnerships? They're arrangements where family members pool money for a business like real estate, providing tax benefits for generational wealth.
Is it expensive to run an FLP? Yes, it can be—you'll need tax specialists and estate lawyers for setup and ongoing management.
How many people do you need? At least two related members, with one or more general partners managing operations.
The Bottom Line
An FLP is a limited partnership where family members buy shares, offering gift and estate tax advantages to pass profits to heirs and build wealth. But rules are complicated, so follow them carefully to keep the tax benefits, and remember there's risk of loss if the business fails or is mismanaged.
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