Legal Definitions - family limited partnership

A family limited partnership (FLP) is a type of legal entity that families can use to start a business together or to plan their estate. It is made up of general partners who manage the business and limited liability partners who only invest in the business. This structure allows certain family members to oversee the business while allowing others to benefit from the profits.

For example, a family may use an FLP to start a real estate business. The parents can be the general partners who manage the business, while the children can be the limited partners who invest in the business. This allows the parents to oversee the business while the children can benefit from the profits.

FLPs can also be used as a way to gift shares to other family members in a tax-efficient manner. For instance, a grandparent may gift shares of an FLP to their grandchildren, using the annual tax exclusion amount for each family member. This allows the grandparent to transfer wealth to their grandchildren without incurring gift tax.

However, FLPs can be problematic because they come with liability for the general partners and, in some cases, for the limited partners. Additionally, FLPs cannot be used to gift personal assets while maintaining the tax benefits, limiting their use to investment and real estate assets.