The Discount Engine: Family Limited Partnerships (FLP)
The Discount Engine: Family Limited Partnerships (FLP)
How to legally convince the IRS that your $10M asset is only worth $7M. The mathematics of “Lack of Control” and “Lack of Marketability” discounts.
Executive Summary
- The Concept: If you own a $10M building directly and give it to your child, the IRS values the gift at $10M. But if you put the building into a **Family Limited Partnership (FLP)** and give your child a “99% Limited Partner Interest,” the value is no longer $10M.
- The Discount Logic: The IRS acknowledges that a “Limited Partner” share is worth less than the underlying asset because:
1. Lack of Control (DLOC): The LP cannot make decisions (sell, refinance).
2. Lack of Marketability (DLOM): You cannot easily sell an LP interest to a stranger.
👉 Result: A combined discount of 25% to 35% is common. - The Leveraged Gift: By applying a 30% discount, you can transfer $14M of real assets using only $10M of your Lifetime Gift Exemption. You effectively created $4M of tax-free wealth transfer out of thin air.
The “Section 2036” Trap
Piggy Bank Warning: The IRS wins FLP cases when the parent (General Partner) treats the FLP bank account like a personal wallet.
👉 Rule: You must respect the entity. Assets must be legally titled to the FLP. Distributions must be pro-rata. You cannot use FLP money to pay for your groceries or personal vacation. If you do, the IRS pierces the veil and includes 100% of the assets in your estate.
Mechanic: The Value Compression
Simulation: Transferring a $10M Apartment Complex
| Feature | Direct Ownership | Family Limited Partnership (FLP) |
|---|---|---|
| Valuation Basis | Fair Market Value | Discounted Value (Lack of Control) |
| Asset Protection | None (Seizable) | Charging Order Protection |
| Management | Fractured (if multiple heirs) | Centralized (General Partner decides) |
“In the eyes of the IRS, a minority interest in a family business is like a ticket to a concert that you can’t resell and can’t choose the seat for. It’s inherently worth less than the ticket price. Smart families use this ‘flaw’ to transfer massive wealth at a discount.”