Quick answer: A family limited partnership (FLP) is a legal entity where parents act as general partners — controlling the assets — and gift limited partnership interests to children at a valuation discount of 15–40%. This lets families transfer significant wealth to the next generation at a reduced gift/estate tax cost while the parents maintain day-to-day control of the business or investments.
How the Valuation Discount Works
When you gift a minority interest in a limited partnership, that interest is worth less than its proportional share of the underlying assets — because limited partners cannot force a sale or liquidate their interest. Appraisers apply a "lack of marketability" and "minority interest" discount, often 20–35%. If the FLP holds $2 million in farmland and you gift a 30% limited interest, you might gift roughly $420,000 in taxable value instead of $600,000 — a meaningful estate tax and gift tax savings on large transfers.
Asset Protection Benefit
A creditor of a limited partner typically cannot seize the limited partnership interest directly. Texas law limits their remedy to a "charging order" — the right to receive distributions if and when the general partner decides to make them. Since the general partner (parent) controls distributions, a creditor may end up with a tax liability on phantom income and little else. This makes FLPs a solid deterrent against family creditors, including divorcing spouses in certain structures.
IRS Scrutiny and Best Practices
The IRS closely watches FLPs because they have been misused. To survive audit scrutiny, the partnership must have legitimate non-tax business purposes (centralized management of family assets is valid), must be properly funded and operated as a real entity, and parents should not retain use of partnership assets for personal expenses. Work with a qualified estate attorney and CPA who have specific FLP experience — the penalties for a disallowed FLP can be severe.
Questions About Protecting Your Wealth?
Kyle Ellison is a licensed financial professional in TX, CA, NV, MT, UT, NM helping families protect and pass on what they've built.