What it means
In a family limited partnership, often shortened to FLP, the parents contribute assets such as commercial property, a share portfolio or an operating business. They receive a small general partner interest that carries all the management power, plus a large limited partner interest that carries only economic rights.
Over time they gift or sell those limited interests to the next generation. The appeal is that a limited partner cannot force a sale, cannot vote on how the assets are run and usually cannot transfer the interest without consent.
A willing buyer would pay less than the pro rata value of the underlying assets for something that illiquid and powerless, and tax valuation follows that same logic. The result is a smaller taxable gift for the same economic transfer.
It matters beyond tax as well. The structure keeps a family business or property portfolio inside one legal container rather than fracturing into dozens of individually owned slices, which makes decisions faster and refinancing simpler.
It also offers some protection if a child divorces or is sued, because what has been transferred is a restricted partnership interest rather than cash or property. The discounts are the contested part.
Appraisers apply a discount for lack of control and a further discount for lack of marketability, commonly landing at a combined 20% to 40%, and tax authorities scrutinise aggressive numbers closely. Structures fail when the parents keep treating the assets as their own, ignore partnership formalities, or set up the entity purely to save tax with no genuine business purpose.
Running one properly costs money and attention. Expect regular valuations, a separate partnership tax return, formal meetings and a real separation between family money and partnership money.
Families with modest estates often find the running cost outweighs the benefit.
In practice
Real-world examples.
Example
A family owning six apartment buildings worth $24,000,000 places them into a family limited partnership. The parents gift 5% limited interests each year to their three children, using discounted valuations to keep each transfer within the annual gift exclusion while retaining full control of leasing and refinancing decisions.
Example
A second-generation manufacturing family uses an FLP to hold the operating company's shares. When one sibling wants out, the partnership agreement sets a buyout formula and a payment schedule, which avoids a forced sale of the business.
Example
A couple approaching retirement moves a $6,000,000 share portfolio into a family limited partnership and gifts limited interests to a trust for their grandchildren. Their adviser stresses that they must not use partnership funds for personal expenses, because that behaviour is the fastest way to have the structure disregarded.
Formula
Calculation
Gift value of a limited partnership interest = (Net asset value x Percentage interest) x (1 - Combined valuation discount)
A family partnership holds commercial property and listed shares with a net asset value of $10,000,000. The parents want to gift a 20% limited partnership interest, split between their two children. The pro rata share of the assets is $10,000,000 x 20% = $2,000,000.
An independent appraiser applies a 15% discount for lack of control and a further 20% discount for lack of marketability. These are applied in sequence, not added, so the combined discount is 1 - (0.85 x 0.80) = 1 - 0.68 = 32%.
The reported gift value is therefore $2,000,000 x 0.68 = $1,360,000, a reduction of $2,000,000 - $1,360,000 = $640,000 against the pro rata figure. At a marginal estate and gift tax rate of 40%, that reduction is worth $640,000 x 0.40 = $256,000 of tax, assuming the appraisal survives review.Case study
Seen in the real world.
This is an illustrative and entirely fictional example. The Aldergate family, invented for this entry, owned four retail parks valued together at $18,000,000, held personally by two parents in their seventies. Their estate plan showed a projected tax bill that would have forced a sale of at least one property.
Their advisers formed Aldergate Properties Limited Partnership. The parents contributed the four properties and took a 2% general partner interest plus a 98% limited partner interest. They then gifted 8% limited interests each year across their four children. On a pro rata basis, 8% represented $18,000,000 x 8% = $1,440,000; after a combined 30% discount the reported gift value was $1,440,000 x 0.70 = $1,008,000 a year.
The family also did the unglamorous work: annual partnership meetings with minutes, a separate bank account, a fresh appraisal each year, and market-rate management fees paid to the general partner. In this illustrative story the discipline mattered more than the discount, because the discount only holds up when the partnership genuinely operates as one.
Watch out
Common mistakes.
- Assuming the discount is automatic. It has to be supported by a qualified appraisal and by partnership terms that genuinely restrict control and transfer.
- Treating the partnership bank account as a personal account. Paying household bills from partnership funds is the single most common reason these structures are unwound on review.
- Setting one up with no purpose other than tax. A partnership that never makes an investment decision or holds a meeting looks exactly like what it is, and the discounts are then vulnerable.
Questions
People also ask.
What is the difference between a lack of control discount and a lack of marketability discount?
The first reflects the inability to direct the assets, and the second reflects the difficulty of finding a buyer for a restricted interest; they are usually applied one after the other rather than added together.
Can the parents still receive income from the partnership?
Yes, they receive distributions on the interests they still hold, but taking more than their proportionate share undermines the structure.
Is a family limited partnership worth it for a smaller estate?
Often not, because annual appraisal, legal and accounting costs can run into five figures and may exceed the tax saved.
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