what is a family limited partnership flp 
a family limited partnership flp is an arrangement in which family members pool money to run a business project each family member buys units or shares of the business profits are shared in proportion to the number of shares each member owns which is outlined in the partnership operating agreement understanding a family limited partnership flp family limited partnerships have two types of partners flps vary depending on the nature of the business for example suppose an individual wants to start a luxury apartment venture they expect the project to cost 1 million including working capital and take in about 200 000 in cash each year before interest on mortgage payments and taxes they calculate that they ll need at least a 50 down payment of 500 000 and decide to work with family members to fund the business the family members agree to establish an flp that will issue 5 000 limited partnership shares at 100 each for a total of 500 000 the limited partnership agreement states that units cannot be sold for at least six years and the flp will pay 70 of cash earnings in the form of dividends as the general partner the original individual who made the calls buys 500 shares by contributing 50 000 to the flp family members buy the remaining shares now each family member owns a stake in an flp and the business has 500 000 available to begin operations the general partner can get a first mortgage loan for the rest of the 500 000 to start the 1 million luxury housing project the flp then leases these apartments to tenants and begins taking income from rent as the mortgage is paid off profits and dividends are distributed and each family member profits benefits of family limited partnershipsthere are some estate and gift tax advantages of forming a family limited partnership these allow families that form an flp to more easily pass the wealth they are building onto their children and grandchildren increasing their family s generational wealth individuals can gift flp interests tax free to other individuals every year up to the annual gift tax exclusion for calendar year 2022 the gift exclusion is 18 000 for individuals or 36 000 per married couple this is an increase from 17 000 for calendar year 2023 or 34 000 per married couple 2suppose a couple amassed savings worth 5 million they have three children and nine grandchildren the couple decides to transfer the entire amount to the flp they established if the gift tax exclusion remains at 2024 levels the couple can gift 36 000 to each of their 12 kids or grandkids each year this means the couple can transfer 432 000 worth of flp interests gift tax free every year however since the gift tax exclusion is generally adjusted annually for inflation this amount will likely increase each year assets in an flp effectively leave the partners estates as far as the irs is concerned this means that any future returns would be excluded from estate taxes the couple s children and grandchildren would benefit from any interest dividends or profits generated from the flp this further preserves wealth for future generations partners can set stipulations in the partnership agreement to protect these gifts from being squandered or mismanaged for example they can develop a rule stating that gifted shares can t be transferred or sold until the beneficiaries reach a certain age if any beneficiaries are minors the shares can be transferred through a uniform transfers to minors act utma account because the structure of flps and the tax laws that govern them are complex families should consult qualified accountants and tax professionals before establishing an flp drawbacks of family limited partnershipsthere are downsides to creating an flp first it can be expensive to set up and maintain because of its complexity most often setting up an flp will call for a tax specialist and estate planning attorney and you may need to call on other professionals associated with helping to support an flp for tax purposes an flp has to run as a business this can expose the partners to liabilities and debts if the business is mishandled by the general partners other drawbacks include capital gains liability and the difficulty transfering ownership interest to minors estate and gift tax advantagesbuild generational wealthset up and maintainence expensestransfers to minors can be difficultrisk of members incurring debt