The FLP Strategy: The Art of “Valuation Discount”
Tax Tips / Legal & Structuring
The FLP Strategy: The Art of “Valuation Discount”
💡 Executive Summary
- Problem: Transferring $10M of assets directly to heirs triggers tax on the full $10M.
- Solution: Wrap assets in a Family Limited Partnership (FLP). Heirs receive restricted “Limited Partnership” units.
- Result: Value is discounted by ~30% for tax purposes (Lack of Control + Lack of Marketability).
⚠️ IRC § 2036 TRAP
The IRS will pierce the FLP if you treat it as a personal piggy bank. To survive an audit, you must respect formalities: keep separate bank accounts and have a legitimate non-tax business purpose.
The IRS will pierce the FLP if you treat it as a personal piggy bank. To survive an audit, you must respect formalities: keep separate bank accounts and have a legitimate non-tax business purpose.
In Advanced Planning (L3+), we rarely transfer raw assets (Real Estate/Stock). We transfer “Business Interests.” An FLP allows parents to retain 100% operational control while transferring the economic value—at a steep discount.
🧐 Core Mechanic: The Discount
A minority interest in a private partnership is worth less than the underlying cash because you can’t sell it easily (Illiquidity) and you can’t force decisions (No Control). The IRS accepts this reduction in value.
A minority interest in a private partnership is worth less than the underlying cash because you can’t sell it easily (Illiquidity) and you can’t force decisions (No Control). The IRS accepts this reduction in value.
Performance Simulation
Tax Base Calculation ($10M Portfolio)
Direct Transfer (Raw Asset)
Taxed on $10.0M
Full Value
FLP Transfer (30% Discount)
Taxed on Only $7.0M
$3M “Vanished”
Structure: General vs. Limited
| Role | Ownership % | Authority & Liability |
|---|---|---|
| General Partner (GP) | 1% (Parents) | 100% Control / Full Liability |
| Limited Partner (LP) | 99% (Heirs/Trusts) | 0% Control / Limited Liability |
| Strategic Goal | Retain Power | Transfer Value (Discounted) |
“Control is not about ownership percentage; it is about structure. The FLP allows you to give away the car but keep the steering wheel.”
🔗 Related BMT Playbooks (Internal)
🛡️ Next Step: Selling FLP Units to an IDGT 📉 Foundation: Qualified Appraisal Requirements ✅ Defense: Charging Order Protection Explained🏛️ Institutional Resources (External)
📜 Legal Text: IRC § 2036 (Transfers with Retained Life Estate) ⚖️ Case Law: Strangi v. Commissioner (The “Deathbed” FLP Failure) 🏛️ IRS Ruling: Rev. Rul. 59-60 (Valuation Principles)
BMT designs for tax reality, not theory.