What is a Family Limited Partnership (FLP)?

Setting up a family limited partnership (FLP) in or near the San Antonio area requires the advice and services of a San Antonio estate planning attorney. A family limited partnership is a business or holding company owned by two or more family members in which family members:

  1. pool money to run a business project, and
  2. buy units or shares of the business

Profit sharing is based on the number of shares owned by each family member, as outlined by the partnership operating agreement. A San Antonio estate planning lawyer can assist you with setting up a family limited partnership that preserves your family’s generational wealth and allows tax- transfers of real estate, assets, and other wealth.

How Do Family Limited Partnerships Work?

An FLP can protect your assets and reduce your gift tax and estate tax burden. FLPs are used in business continuity plans and business succession planning, and an FLP may be a key component of a high net-worth family’s estate plan. FLPs have two types of owners or partners:

  1. General partners typically own the largest share of the business. They oversee investment transactions and cash deposits and manage the business on a day-to-day basis. If the partnership agreement allows, they may also receive a management fee from the profits.
  2. Limited partners purchase shares of the business and receive profits, dividends, and interest the FLP generates, but they do not assume any management responsibilities.

Why Establish a Family Limited Partnership?

A family limited partnership is usually established by a married couple who act as the general partners and who transfer assets to the FLP. The couple then grants limited partnership interests to their children and/or grandchildren – up to 99 percent of the FLP’s value.

The limited partnership interests remove those assets from the general partners’ estates, reducing their future estate taxes. The general partners retain control of the family limited partnership, although they may actually own as little as one percent of the asset value.

The limited partners may then receive distributions from the family limited partnership and qualify for certain gift tax and estate tax benefits.

What Are the Gift Tax and Estate Tax Benefits Provided by FLPs?

When an FLP is established, assets transferred to the FLP are protected and usually beyond the reach of creditors. As of 2024, the annual gift tax exclusion (the amount you may give annually to another person without tax consequences) is $18,000 (and $36,000 for married couples). The dollar limit changes every year.

Based on the 2024 exclusion, a married couple with twelve children and grandchildren may transfer $432,000 of family limited partnership interests every year without incurring a gift tax. The exclusion is adjusted annually, so the transferable amount should increase every year.

Assets transferred to an FLP leave the partners’ estates, so future returns are excluded from estate taxes, and the couple’s children and grandchildren benefit from the profits, dividends, and interest generated by the FLP, further preserving the family’s wealth for future generations.

How Are Assets Protected by FLPs?

When you establish an FLP, it is important to understand the rights and limitations of a partner’s creditors when the partner’s assets are protected by ownership in a family limited partnership. A limited partner’s creditor may attempt to seize only three types of assets related to the FLP:

  1. Limited partnership interest: A limited partner’s creditor may not seize the partnership interest but may have the court issue a charging order against it. This gives a creditor the right to claim distributions or liquidation payable to the limited partner.
  2. Distributions or profits payable to the limited partner: Only general partners may decide to distribute profits. Creditors cannot force distributions, so general partners may simply delay distributions until a creditor with a charging order decides to settle.
  3. Assets transferred fraudulently to the family limited partnership: Creditors have options when assets are transferred fraudulently to an FLP. A court may determine that a transfer of assets made to prevent a creditor from collecting constitutes a fraudulent transfer. The court can then order the transfer reversed or impose other sanctions.

What is and is not a fraudulent transfer may depend a great deal on how the family limited partnership is structured. That’s one reason why it is so important to establish your family limited partnership with the advice and guidance of an experienced San Antonio estate planning attorney. For more detailed tax advice, you should also consult with a CPA and ask about the tax differences between a FLP and a LLC.

Are There Any Disadvantages to Family Limited Partnerships?

There may be several disadvantages to consider when you set up a family limited partnership. FLPs are complicated, so a family limited partnership may require a great deal of time and resources to establish.

For example, as your family limited partnership grows over time, along with the advice and services of a San Antonio estate planning lawyer, you may also require the advice of a tax specialist and other financial experts.

And for tax purposes, a family limited partnership must be operated as a business. If the general partners mishandle the FLP operations, all of the partners may be exposed to debts and liabilities. Having the right legal and financial advice is imperative to obtain the full benefits of an FLP. This is sometimes difficult for some family members who are accustomed to treating the property as their own. There is very little oversight, except by the other partners, unless the partners are sued by a third party, and then it is often too late to change how the business was operated in the past.

Let the Laura D. Heard Law Firm Prepare Your Family Limited Partnership

As a family law and estate planning attorney based in the San Antonio area, Laura D. Heard understands that protecting your family includes protecting your savings, properties, and other assets. If you have not yet planned your estate, now is the time.

Along with a family limited partnership, the Laura D. Heard Law Firm can prepare an irrevocable or revocable trust, an advance medical directive, a financial power of attorney, a last will and testament, or any other document required for your estate planning needs. Attorney Laura D. Heard has been advising and representing families in the San Antonio area since 1987.

To learn more about FLPs and estate planning, or to set up an FLP or begin the estate planning process now, call the Laura D. Heard Law Firm at 210-775-0353 to schedule your first legal consultation. Attorney Laura D. Heard will work on your family’s behalf for the results you need.