As with conventional limited partnerships, family limited partnerships are comprised of both general and limited partners. The only difference is that these positions are held by family members. To form a limited partnership, the partners must file a certificate with the state. Once formed, the FLP is considered a legally distinct entity and assigned a tax identification number. The FLP can then own assets and conduct most business activities.
Setting up an FLP requires placing your assets into the partnership using your estate tax credit. For example:
A husband and wife can each transfer up to $5 million ($10 million total) to other family members as limited partners without paying estate or gift taxes and then allocate those assets to the limited partners. They can then place a smaller amount (typically 1% of total assets) into the FLP and assign ownership of this amount to the general partners. There are usually no taxes incurred when funding an FLP as long as you do not exceed the maximum contribution.
At first, you and your spouse own both general partner and limited partner shares. Over time, you can grant your family members limited partner shares using your annual $13,000 gift exclusion. Don't worry about giving away too many of your shares. Based on current tax law, general partners may own as little as 1% of the FLP's assets and still retain control of the partnership. That means you can still buy and sell assets, dispose of property and distribute additional FLP shares.
The IRS has increasingly scrutinized FLPs as potentially abusive tax shelters. To avoid unwanted scrutiny, take care when assessing the value of your assets and ensure that there is a legitimate business purpose for establishing the FLP (see the Estate Tax Credits section).