Legal Definitions - family limited partnership

A Family Limited Partnership (FLP) is a specific legal business structure designed for families to manage assets, operate a business, or facilitate the transfer of wealth across generations.

In an FLP, there are typically two types of partners:

• General Partners: These individuals are responsible for managing the partnership's assets or business operations. They make the day-to-day decisions and often retain significant control over the partnership. General partners typically bear unlimited liability for the partnership's debts and obligations.
• Limited Partners: These individuals contribute capital or assets to the partnership but do not participate in its management. Their liability is generally limited to the amount of their investment. Limited partners typically receive a share of the partnership's profits.

FLPs are often used for estate planning purposes, allowing older family members to transfer ownership interests in family businesses or investment portfolios to younger generations in a tax-efficient manner, while still maintaining control over the underlying assets or operations. This structure can help reduce the value of an individual's taxable estate and utilize annual gift tax exclusions. However, FLPs are primarily suited for investment assets and real estate, and general partners assume personal liability for the partnership's actions.

Examples of Family Limited Partnerships:

• The "Green Acres Farm" Succession Plan: The Miller family owns a large, successful agricultural business, "Green Acres Farm." The parents, John and Mary, want to gradually bring their three adult children into ownership and allow them to benefit from the farm's profits, but John and Mary wish to retain full control over farming operations, land management, and major business decisions for the next decade. They establish an FLP where John and Mary are the general partners, managing the farm's daily activities and strategic direction. Their children are the limited partners, receiving ownership interests and a share of the farm's profits without having any management responsibilities. This allows for a smooth transition of wealth while ensuring experienced leadership remains in place.

  How this illustrates an FLP: The parents maintain control as general partners, while the children receive passive ownership and profits as limited partners, demonstrating the separation of management from ownership for wealth transfer within a family business context.

• The "City Lights Properties" Investment Portfolio: The Chen family owns a portfolio of commercial rental properties in various city centers. The grandparents, David and Susan, want to transfer the value of these properties to their grandchildren over time to reduce their future estate tax burden. They create an FLP called "City Lights Properties." David and Susan contribute the properties to the FLP and become the general partners, continuing to manage the leases, property maintenance, and financial operations. They then begin gifting small, non-controlling ownership units (limited partnership interests) to their grandchildren each year, utilizing their annual gift tax exclusions. The grandchildren become limited partners, benefiting from the properties' appreciation and rental income without needing to manage any aspect of the real estate.

  How this illustrates an FLP: This example shows an FLP used for estate planning with real estate assets. The grandparents retain management control as general partners while transferring economic value to younger generations as limited partners, leveraging tax benefits.

• The "Innovate Ventures" Family Investment Fund: The Rodriguez family has accumulated a significant amount of liquid assets, including stocks, bonds, and mutual funds. The patriarch, Miguel, wants to consolidate these investments into a single managed fund that can benefit his children and grandchildren, but he wants to oversee the overall investment strategy and asset allocation. He forms an FLP named "Innovate Ventures." Miguel contributes the bulk of the assets and becomes the general partner, making all investment decisions and managing the fund. His children and grandchildren are given limited partnership interests, allowing them to participate in the growth and income generated by the fund's investments without having any say in the investment choices. This structure ensures a unified investment approach while distributing wealth to future generations.

  How this illustrates an FLP: Here, an FLP is used to manage a diversified investment portfolio. The general partner (Miguel) controls the investment strategy, while the limited partners (children and grandchildren) benefit from the fund's performance, demonstrating how FLPs can consolidate and manage family wealth across generations with retained control.