How Family Limited Partnerships Can Secure Your Financial Legacy

Family Limited Partnerships: A strategic approach to gifting and control

There are many strategies to consider when planning for both estate transfer taxes and income taxes. One of the popular strategies focuses on the use of a Family Limited Partnership (FLP). The FLP strategy and can be funded with various types of assets: closely held businesses, publicly traded securities, and other income producing assets. Once the newly formed partnership owns the asset, the planning strategy calls for various ownership percentages of the partnership to be gifted to other family members thereby reducing the estate of the contributor and shifting future appreciation to the new owner.

Gifting strategies

A gifting strategy centered on an FLP can be an extremely efficient way to transfer wealth if minority discounts or lack of control discounts apply. The amount of the discount will vary depending on the percentage of the interest gifted and the investments owned by the partnership; the discounted value can be meaningful and might range between 10 and 50% if certain conditions apply. A qualified valuation is required by the IRS to support the discounts claimed when filing the individual’s gift tax return (Form 709). Some individuals may opt to gift a percentage of the partnership equal to the annual exclusion amount annually to family members (the 2025 annual exclusion is $19,000 per recipient per donor). Other individuals may opt to gift more in a single year (especially if incurring the cost of a valuation). In the case where more than the annual exclusion amount is gifted, the fair market value of the gifted partnership interests in excess of the annual exclusion reduces the individual’s remaining lifetime exemption. The 2025 lifetime exemption is $13,990,000 per taxpayer, and this is the amount that taxpayers can transfer cumulatively during their life or at their passing before a 40% estate tax applies. The 2026 lifetime exemption will be $15,000,000 per taxpayer. With the passage of the One Big Beautiful Bill Act earlier this year, the lifetime exclusion amount is permanent and will be indexed for inflation annually.

As noted earlier, the benefit of the FLP is shifting the future appreciation on the assets gifted to family members out of the contributor’s taxable estate (any appreciation occurring after the date of the gift is no longer included as part of the contributor’s taxable estate). The family may also pay lower income tax in totality if the contributor is in a higher marginal tax bracket and the recipients are other adult family members who are subject to lower marginal tax brackets. The partnership has an ongoing annual income tax filing requirement, and each new owner is subject to income tax on their portion of the partnership income when they file their personal returns each year. Cash flow from investments may also be distributed to the new owners to cover income tax liabilities on a quarterly or annual basis. The partnership structure also permits flexibility related to distribution of assets which are owned by the partnership with minimal income tax impacts.

Educating the next generation and retaining control

Family Limited Partnerships can also facilitate educational objectives for parents who hope to educate their children and grandchildren about different aspects of wealth while also retaining control and possibly a majority interest in the partnership. The FLP strategy could be a good way to prepare family members for stewardship of additional wealth transfers in the future.

Please consult your Keiter Opportunity Advisor if you have questions on the potential impact and benefits of incorporating a Family Limited Partnership into your financial plan.