Family Limited Partnerships as Part of California Estate Planning
California families face complex laws and financial concerns when planning for the future, especially when passing wealth to the next generation. One tool that has gained popularity among high-net-worth individuals is the Family Limited Partnership. Though not suitable for everyone, an FLP can be valuable in estate planning, asset protection, and wealth management when used correctly.
What Is a Family Limited Partnership?
A Family Limited Partnership (FLP) is a business entity formed under state law to manage family-owned assets.
Like any limited partnership, an FLP has at least one general partner and one or more limited partners. The general partner controls the management of the partnership, while the limited partners have ownership interests but no control over day-to-day operations. FLPs are usually established by parents who contribute assets, such as real estate, business interests, investment portfolios, or other valuable property, to the partnership. The parents typically serve as the general partners, while their children or other family members receive limited partnership interests by gift or sale.
Advantages of Using an FLP in Estate Planning
Asset Management and Control
One benefit of an FLP is the ability it gives parents to retain control over family assets while gradually transferring ownership to the next generation. As general partners, the parents can decide how assets are invested, whether sold or held, and how distributions are made, even if they’ve already transferred a significant portion of ownership to their children as limited partners. This feature allows for centralized asset management and avoids fragmentation, especially when dealing with complicated holdings like family-run businesses or real estate investments.
Gift and Estate Tax Advantages
FLPs can offer substantial estate tax benefits, especially with valuation discounts. When a general partner transfers limited partnership interests to children or other beneficiaries, the value of those interests may be discounted for gift tax purposes. This is due to restrictions placed on limited partners, such as a lack of control and limited marketability.
Protection from Creditors
Another benefit of an FLP is the layer of protection it provides against creditors. In California, a limited partner’s creditor cannot seize partnership assets directly. Instead, they may be limited to a charging order, which entitles them only to any distributions made to the debtor-partner. This can deter creditors from pursuing collection against partnership interests and help safeguard family assets from lawsuits, divorce settlements, and other claims. It’s important to note that this protection isn’t absolute. Courts may disregard an FLP if it’s seen as fraudulent or created to defraud creditors. Proper formation, funding, and ongoing management are essential to maintaining the FLP’s legitimacy and protective features.
Facilitating Intergenerational Wealth Transfer
FLPs make it easier to transfer wealth in a structured and phased manner. Parents can gift limited partnership interests to their children annually using the IRS’s gift tax exclusion, which in 2025 is $18,000 per recipient.
Gradually transferring interests over several years allows a family to move substantial wealth out of the estate without triggering significant gift taxes. Parents may use their lifetime gift and estate tax exemption, $13.99 million per individual in 2025, to transfer even larger interests without incurring federal estate taxes. When the time comes, the FLP interests held by children may also be passed to their heirs, supporting multi-generational wealth planning.
Important Considerations and Pitfalls
California families should be aware of several important considerations and potential pitfalls.
Legal and Tax Complexity
Setting up and maintaining an FLP requires careful legal and tax planning. The entity must be properly formed under California law, and the assets transferred into the partnership must be documented. The partnership should have a legitimate business purpose and conduct transactions at fair market value. Failure to observe these formalities can lead to IRS scrutiny or even the invalidation of the partnership for tax purposes. Families should work closely with experienced estate planning attorneys and tax advisors to ensure compliance and avoid costly mistakes.
Potential IRS Challenges
The IRS monitors FLPs closely, particularly when valuation discounts are used. If the agency believes an FLP lacks a valid business purpose or was created solely to avoid taxes, it may disallow the discounts or impose penalties.
Courts have sometimes sided with the IRS when FLPs were found to be improperly structured or operated more like personal bank accounts than legitimate business entities. To avoid problems, families should separate personal and partnership finances, document all meetings and decisions, and ensure that distributions and activities are consistent with the FLP’s stated purposes.
Family Dynamics
Family dynamics may impact financial arrangements. Disagreements over distributions, asset management, or succession planning can strain relationships and even lead to litigation. It’s important to communicate openly, set expectations early, and involve all stakeholders in planning. Including provisions for dispute resolution, such as mediation or arbitration, in the partnership agreement can help avoid costly legal battles.
When an FLP Makes Sense
Family Limited Partnerships are most appropriate for families with significant, complex assets and a clear desire to keep wealth within the family for future generations. They’re particularly useful for families with closely held businesses or investment real estate, high-net-worth individuals concerned about estate taxes, families looking to protect assets from creditors, or parents wanting to transfer wealth while maintaining control.
Secure Your Family’s Future
Are you looking to protect your assets, reduce estate taxes, and transfer wealth to the next generation without giving up control? A Family Limited Partnership could be the solution. The Singh Law Firm helps California families set up customized, legally sound FLPs tailored to their long-term goals. Whether you’re managing investment properties, a family business, or a substantial portfolio, we’ll help you structure your partnership.
Schedule your free consultation today by calling 510-901-5375 in Silicon Valley or 818-658-2174 in Los Angeles.
