What is a family limited partnership?

How do you hand the family business or the apartment building down to your kids without giving up the wheel, and move it at a tax discount on the way? One tool is a family limited partnership. You keep control as the general partner, gift limited interests to your children over time, and those interests can be valued at a discount for transfer tax.

How it works

You put a family asset, a business, real estate, an investment portfolio, into a partnership. You hold a small general partner stake that controls all the decisions. Your children get limited partner interests: they own a share of the value, but no say in how it’s run.

Then you gift those limited interests down over the years, using your annual gift exclusion, $19,000 per child for 2026, and your lifetime exemption where needed. You stay in command while the value, and its future growth, steadily leaves your estate.

The discount that does the heavy lifting

Here’s the part that makes the FLP more than a glorified gifting account. A limited partner interest is genuinely worth less than its slice of the underlying assets, for two real reasons. The holder can’t control the partnership (a lack-of-control discount), and they can’t easily sell their stake to an outsider (a lack-of-marketability discount).

So a limited interest representing $1,000,000 of underlying assets might be appraised meaningfully below that for gift tax purposes. You transfer the full economic share but use up less of your exemption doing it. Stack that across years and several children and you move serious wealth out of your estate at a fraction of the transfer-tax cost.

The catch the brochures skip

The IRS dislikes this structure and audits it hard. The discounts only hold up if the partnership is real: a legitimate business or investment purpose, actual respect for the partnership formalities, and assets that aren’t just your personal checkbook in disguise. Run it like a sham, mixing personal expenses through it, ignoring the paperwork, and the IRS can collapse the discounts and pull the whole thing back into your estate, sometimes with penalties.

This is not a do-it-yourself move. It needs a qualified appraisal, careful drafting, and disciplined operation. Done sloppily, the tax savings vanish and you’ve bought an audit. Done right, with a real asset and real formalities, it’s a durable way to transfer a family enterprise.

Is it for you

An FLP fits a family with a genuine business or investment asset, an estate large enough to face transfer tax (the federal exemption is a permanent $15,000,000 per person for 2026), and the discipline to operate the partnership properly. If the goal is simply moving cash to kids, annual gifting or a grantor trust is simpler and cleaner.

Control and a discount in the same package is a rare combination in estate planning. Just respect the rules that make it work, because the IRS is reading the fine print right along with you.