A family limited partnership (FLP) is a limited partnership among family members. Typically, one or both parents creates the FLP, assuming both general partner (GP) and limited partner (LP) roles. Then they transfer assets from their personal accounts to the FLP.
The assets transferred might include marketable securities, stock options, investment real estate, or shares in a closely-held corporation. No tax is imposed on such transfers because they essentially involve moving assets from one pocket to another. After the FLP has been created by the parents, limited partnership interests can be transferred to other family members, usually the children of the creators. In some cases, 98 percent or 99 percent of the FLP is held by the children, as limited partners. Even though the underlying assets are effectively held by the children, after these transfers, the parents, as GPs, still maintain control.
Why would you want to follow this strategy? Any appreciation of the assets in the FLP will be out of your taxable estate. Moreover, income earned by the FLP assets will be picked up by the limited partners, pro rata. Thus 98 percent or 99 percent of the income might be taxed to your children, who may be in a lower tax bracket than you are.
