Unlocking Tax Savings: Family Limited Partnerships in Estate Planning

As Trump era estate tax cuts are coming to an end — unless the cuts are extended by Congress —wealthy business owners are increasingly utilizing Family Limited Partnerships (FLPs) in their planning to significantly save the family taxes when the cuts are gone. This article explores how FLPs can offer your clients opportunities for legal protection, charitable giving, and long-term family wealth planning.

Understanding Family Limited Partnerships

An FLP is a business holding company owned by two or more family members. Family members buy shares of the business and profit in proportion to the number of shares they own, which is outlined in the operating agreement.

Types of Partners in FLPs

Family Limited Partnerships consist of two distinct partner roles: General partners and Limited partners. General partners typically hold the majority share and handle daily management tasks and investment transactions. They may also receive a management fee from profits as outlined in the operating agreement. On the other hand, Limited partners have no management duties. They earn dividends, interest, and profits based on their ownership shares in the FLP.

Leveraging FLPs for Estate Tax Exemptions

Wealthy business owners can leverage the current estate tax exemption, set at $13.99 million per individual or $27.98 million per married couple in 2025, by utilizing Family Limited Partnerships to transfer assets at significant discounts. For instance, one or both parents may consolidate their business assets, which could encompass real estate and stocks. As the general partner(s), the parent(s) can then designate their children as limited partners and gift them interests in the partnership. Consequently, the children will receive distributions from the generated revenue, albeit without control over the FLP assets. This arrangement allows parents to retain control while ensuring their children benefit from the partnership.

Estate Planning and Asset Transfer

The goal in estate planning is to transfer ownership of the assets to the children before the value increases. Therefore, the assets are transferred out of the parent’s estate and can continue to grow. Additionally, the business owner can claim a discount on the assets within the FLP and utilize less of the estate tax exemption. Examples of discounts claimed are typically between 10% and 45% for cash for business purposes or illiquid assets. However, the higher the discount, the more likelihood of an IRS audit. Limited partners receive discounts because they have no control over the assets or business operations.

Implications of Estate Tax Law Changes

It is estimated that the estate tax will be cut approximately in half when the current law sunsets at the end of 2025 unless Congress affirmatively acts. Today, if a couple transfers assets outright to their children which total over $27.98 million, any assets over that amount will be taxed at 40%. If they wait until they die for their children to inherit their assets, along with the potential decline of the estate tax exemption, their equity may have significantly increased causing a much higher estate tax liability. By gifting equity before the end of 2025 into an FLP, along with utilizing the privately held company’s valuation discount, gift and estate tax could be significantly reduced. If the couple waits until after 2025 to gift the equity and the sunset occurs, they will only be able to gift approximately $14 million compared to the $27.98 million today.

Charitable Planning Opportunities

An FLP also provides a unique opportunity for a family to support charitable causes and minimize estate and income tax burdens. An FLP that holds highly appreciated assets with low-cost basis, such as a family business, real estate or securities, can benefit when an interest in the partnership is gifted to a qualified public charity, donor-advised fund, or even a charitable remainder trust in some cases. In doing so, the partners who transferred a portion of their partnership interest to charity will be eligible for a double tax benefit: (1) an income tax deduction equal to the FMV of the partnership interest valued by a qualified appraiser (factoring in applicable valuation discounts), and (2) avoidance of tax on capital gains upon the transfer to charity. In addition, the asset will be removed from the partner(s) estate for estate tax purposes thus lowering the value of the taxable estate in light of the sunsetting exemption. Most charities may only accept limited partnership interests with a short-term path to liquidity, perhaps through redemption or a third-party sale of the business. A donation of a partnership interest should be made well in advance of a binding agreement to sell the business to avoid “pre-arranged sale” issues. Careful planning and documentation are required when making charitable gifts of FLP interests to ensure valuable tax savings for the family and maximum impact for the social causes that mean most to them.

Legal Protections and Considerations

FLPs also offer some legal protections to limited partners from creditors and divorcing spouses. While protections vary by state, usually the equity is not reachable. Creditors may also end up with a big tax bill because income distributions are not required but the income is still taxed and so the creditor may end up with a tax bill and no way to pay it.

Cautions in FLP Setup

When setting up an FLP, partners must be cautious. Parents should wait many months after setting up the entity to gift shares to their children. If they gift immediately, the IRS might claim the FLP was only formed for the purpose of utilizing the valuation discount. Due to the need to delay the transfer of shares to children, families should not wait to set up FLPs as the end of 2025 closes in. It’s time now to take advantage of Family Limited Partnerships for significant tax savings for families.

About the Authors

Susan L. Friedman
Partner, Kohrman Jackson & Krantz, LLP

Susan Friedman is experienced in all aspects of estate planning, probate, trust and estate administration, special needs planning, charitable planning and guardianships with over 25 years of practice. She is valued by clients for her calm demeanor and ability to actively listen to address clients’ specific needs and develop individualized strategies.

Gunnar M. Crowell, J.D.
Senior Advisor, Charitable Estate Planning, American Heart Association

Gunnar has over 12 years of experience in trust and estate planning, planned and major gift fundraising, and non-cash asset acceptance. Before joining the American Heart Association, Gunnar served as Vice President of Legal Services at Renaissance Philanthropic Solutions Group, where he was responsible for facilitating and managing due diligence for planned and complex asset gifts and grantmaking to charities.

The opinions expressed in this article are solely those of the author and do not reflect the views or endorsements of the American Heart Association (AHA). The AHA does not endorse or assume responsibility for any information or opinions presented in this article.