In a nutshell, a Family Limited Partnership is simply a limited partnership formed by family members. As with limited partnerships there are at least 2 partners, a general partner and a limited partner. The General Partner, (who must own at least 1% of the FLP) controls 100% of the operation, management and investment decision activities of the partnership, and thus bears the unlimited liability or responsibily for the partnership legal obligation and debt. The General Partner could be a Corporation, LLC, or a Trust and thus effectively limiting the family members exposure to personal liability.
The FLP has been recognized by Tax Experts and Financial Planners as a "effective wealth preservation, estate planning and asset protection vehicle". If the FLP has been properly structured, funded and operated it can be an effective tool for minimizing estate, gift and income tax liability, assist in the seamless transfer of wealth from one generation to another and at the same time protect assets from potential creditors!
Sometimes, the FLP may not be properly structured, operated and managed and consequently may trigger an IRS audit. Despite the complexity of the FLP's, as an estate planning tool it remains remarkably one of the most popular tools currently used by Estate Planners for wealth preservation and asset protection of wealthy clients.
The key to a successful FLP is that there must be proper planning, if must be properly funded and must operate within the framework of the tax law and it must have a valid non tax purpose for its creation, and if it meets these conditions the IRS will approve it federal transfer tax purposes.