Family Limited Partnership in Florida

A family limited partnership (FLP) is a wealth transfer and asset protection vehicle in which family members form a limited partnership under Florida law to hold and manage family assets. FLPs have long been used by high-net-worth families to transfer wealth to younger generations at a reduced gift and estate tax cost while retaining management control over the assets. At the Law Offices of Albert Goodwin, PA, we help families throughout South Florida form and operate family limited partnerships as part of comprehensive estate tax planning strategies.

How a Family Limited Partnership Works

A family limited partnership is formed under the Florida Revised Uniform Limited Partnership Act (F.S. Chapter 620). The partnership has two classes of partners: general partners and limited partners. The general partners manage the partnership's operations and make all investment and distribution decisions. The limited partners are passive investors who have an economic interest in the partnership but no management authority.

In a typical FLP structure, the senior generation (the parents) contributes assets to the partnership in exchange for both general partnership interests and limited partnership interests. The parents retain the general partnership interests, which carry management control, and then gift the limited partnership interests to their children or to irrevocable trusts for their children's benefit over time. Because the limited partnership interests carry restrictions on transferability and lack management control, they are eligible for valuation discounts when valued for gift and estate tax purposes.

Valuation Discounts

One of the primary benefits of an FLP is the ability to claim valuation discounts on transfers of limited partnership interests. When a limited partnership interest is appraised for gift or estate tax purposes, the fair market value of the interest is typically less than the proportionate share of the underlying partnership assets because of two key limitations:

Lack of control discount. A limited partner has no authority to manage the partnership, make investment decisions, force distributions, or liquidate the partnership. Because a buyer of a limited partnership interest would acquire an interest with no management rights, the interest is worth less than a proportionate share of the partnership's assets. This discount, often referred to as a minority interest or lack of control discount, can range from 15 to 40 percent or more depending on the specific facts.

Lack of marketability discount. Limited partnership interests are not publicly traded and cannot be freely transferred. Most FLP agreements restrict transfers to family members or require the consent of the general partner before a transfer can occur. Because there is no ready market for these interests, a marketability discount is applied. This discount typically ranges from 15 to 35 percent.

When combined, the lack of control and lack of marketability discounts can significantly reduce the taxable value of a gifted limited partnership interest. For example, if a parent gifts a limited partnership interest with a proportionate share of underlying assets worth $1 million, and the combined discounts total 35 percent, the gift is valued at only $650,000 for gift tax purposes. This allows the parent to transfer more wealth to the next generation within the confines of the lifetime gift tax exemption.

Asset Protection Benefits

An FLP also provides asset protection benefits under Florida law. Under the Florida Revised Uniform Limited Partnership Act, a creditor of a limited partner cannot seize the limited partner's interest in the partnership. Instead, the creditor's sole remedy is a charging order under F.S. § 620.1703, which entitles the creditor to receive any distributions that would otherwise be paid to the debtor-partner. The charging order does not give the creditor any management rights, voting rights, or the ability to force a distribution.

This charging order protection makes FLPs an effective tool for protecting family assets from the creditors of individual family members. If a child who holds a limited partnership interest is sued or faces a judgment, the creditor cannot reach the partnership assets directly. The general partners retain discretion over distributions, and if no distributions are made, the creditor receives nothing (although the creditor may still be liable for income taxes on allocated partnership income, creating a so-called "phantom income" problem for the creditor).

It is important to note that asset protection through an FLP requires that the partnership be established for legitimate business purposes and not solely to hinder creditors. Transfers to an FLP made after a creditor's claim has arisen, or with the intent to defraud creditors, may be challenged under Florida's Uniform Voidable Transactions Act (F.S. Chapter 726).

Estate Tax Reduction

FLPs reduce estate taxes in two principal ways. First, as limited partnership interests are gifted to children or trusts during the senior generation's lifetime, the value of those interests (reduced by applicable discounts) is removed from the senior generation's taxable estate. Second, any appreciation in the gifted interests after the date of the gift occurs outside the senior generation's estate, meaning that the future growth escapes estate taxation entirely.

For families with substantial assets, particularly illiquid assets such as real estate, closely held businesses, and investment portfolios, an FLP can be a central component of an estate freeze strategy. The senior generation retains management control through the general partnership interests while systematically transferring economic value to the next generation at a discounted gift tax cost. Combined with a grantor trust strategy, the tax savings can be even more significant.

Florida Formation Requirements

Forming a family limited partnership in Florida requires compliance with the Florida Revised Uniform Limited Partnership Act. The key steps include:

Filing a certificate of limited partnership. The partnership must file a certificate of limited partnership with the Florida Department of State, Division of Corporations. The certificate must include the partnership's name, the address of its registered office, the name and address of its registered agent, and the name and address of each general partner.

Drafting the partnership agreement. The partnership agreement is the governing document that sets forth the rights, obligations, and economic arrangements among the partners. It should address capital contributions, allocation of profits and losses, distribution policies, transfer restrictions, management authority, admission and withdrawal of partners, dissolution provisions, and any other terms necessary to govern the partnership's operations.

Funding the partnership. The partners must actually contribute assets to the partnership. The FLP should have real economic substance and hold genuine assets. A partnership that exists only on paper, or that holds assets but does not operate as a true partnership, is vulnerable to IRS challenge.

Obtaining a tax identification number. The partnership must obtain an Employer Identification Number (EIN) from the IRS and file annual partnership tax returns (Form 1065).

Operational Requirements and IRS Scrutiny

The IRS has closely scrutinized family limited partnerships, particularly in cases where the FLP appears to have been created primarily for tax avoidance rather than legitimate business purposes. Courts have disregarded FLPs and denied valuation discounts under IRC § 2036 when the taxpayer retained the right to enjoy or control the transferred property, effectively treating the partnership assets as still belonging to the decedent's estate.

To withstand IRS challenge, an FLP must be operated as a genuine business entity. This means holding regular partnership meetings, maintaining separate partnership bank accounts, keeping accurate books and records, actually transferring title of contributed assets to the partnership, making distributions in accordance with the partnership agreement, and respecting the legal formalities of the partnership structure. The partnership should not commingle partnership funds with the personal funds of the partners, and the general partner should not treat partnership assets as their own.

Courts have been particularly skeptical of deathbed FLPs, where the partnership is formed shortly before the senior generation member's death, and of FLPs where the senior generation member contributes substantially all of their assets to the partnership, leaving insufficient personal assets to maintain their standard of living. These patterns suggest that the partnership was created solely for tax purposes and that the transferor effectively retained enjoyment of the partnership assets.

FLP vs. Family LLC

In recent years, many families have used family limited liability companies (LLCs) instead of family limited partnerships for similar planning purposes. Florida LLCs under the Florida Revised Limited Liability Company Act (F.S. Chapter 605) offer many of the same benefits as FLPs, including valuation discounts, charging order protection, and flexible management structures, while also providing limited liability for all members, including the managers. In an FLP, general partners have unlimited personal liability for partnership obligations, which is a significant disadvantage.

The choice between an FLP and a family LLC depends on the specific circumstances of each family, including the types of assets being transferred, the desired management structure, liability concerns, and state law considerations. In many cases, a family LLC may be the more modern and flexible choice, but FLPs remain widely used and well-established in estate planning.

Contact a Florida Family Limited Partnership Attorney

A family limited partnership can be a powerful tool for transferring wealth, reducing estate taxes, and protecting family assets. However, FLPs require careful planning, proper formation, and ongoing compliance with both Florida law and federal tax requirements. At the Law Offices of Albert Goodwin, PA, we help families design and implement FLP strategies that achieve their wealth transfer goals while withstanding potential IRS scrutiny. Our office is located at 121 Alhambra Plz #1000, Coral Gables, FL 33134. Call us at 786-522-1411 or email us at [email protected] to schedule a consultation about your estate planning needs.