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Chapter 8

Family Limited Partnerships and Limited Liability Companies

Introduction

A family limited partnership is a nontaxable entity that is created and governed by state statute and
whose partners (both general and limited) and assignees consist mainly of family members. A limited
partnership is created under and governed by the Revised Uniform Limited Partnership Act (RULPA) of
the state in which it is formed. Though the states’ RUPLAs are similar in many respects, each state's act
contains different features (although some states' acts are the same).

A limited liability company has a different legal structure, with characteristics of a corporation and of a
partnership, but the valuation issues resemble those of a family limited partnership. A limited liability
company looks like a partnership or limited partnership in terms of internal structure and relationships
between members, or members and managers, but with the additional characteristic of a liability shield
from vicarious liability for members and managers.

This chapter refers to family limited partnerships and family limited liability companies as FLPs.

FLPs are particularly attractive as estate planning tools because through the creation of an FLP, the fol-
lowing information is true:

 It promotes the efficient and economic management of the assets and properties under one entity.

 Parents or grandparents have the ability to indirectly transfer interests in family owned assets but
maintain the group of assets as a whole.

 Protection against creditors can be achieved at a high degree because a partner's creditor cannot
legally gain access to the assets in the partnership.

 Assets can be kept in the family, which is an objective of many families. This can be achieved by
placing restrictions on the transfer of partnership interests—especially in the event of divorce,
bankruptcy, or death of a partner.

 Problems pertaining to undivided or fractionalized interests when a property is gifted to several
individuals can be avoided. This can be especially important in the case of real estate.

 Advantages can arise through economies of scale and diversification when family owned assets
are placed in a partnership.

 Partnership agreements can provide a great deal of flexibility; partnership agreements can also
provide broad investment and business powers. These can be amended as the family's needs
change, as long as all partners agree.

 Partnerships are pass-through entities and do not pay income taxes.

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