The Family Boardroom: Family Limited Partnerships (FLP)
The Family Boardroom: Family Limited Partnerships (FLP)
How to keep 100% control of your business while giving away 99% of the equity—and shrinking the IRS tax bill by 35% using “Valuation Discounts.”
Executive Summary
- Centralized Control (GP vs. LP): In an FLP, you separate “Control” from “Ownership.” Parents hold the **General Partner (GP)** interest (e.g., 1%) and have 100% voting power. Children (or Trusts) hold the **Limited Partner (LP)** interest (99%) and have 0% say in management.
- The Valuation Discount: If you try to sell a 99% LP interest to a stranger, nobody would buy it at full price because they can’t vote and can’t force a sale. Therefore, the IRS allows you to discount the value of the gift by **30-40%** (Lack of Control & Lack of Marketability).
- Asset Protection (Charging Order): If a child gets sued/divorced, the creditor cannot seize the underlying assets (Real Estate/Stocks) inside the FLP. They only get a “Charging Order”—a right to distributions if the GP decides to distribute. If the GP (Parent) distributes nothing, the creditor gets nothing.
The “Piggy Bank” Trap
IRS Warning: You must treat the FLP like a real business. If you pay for personal groceries or vacations directly from the FLP account, the IRS will pierce the veil, claiming it’s a sham (Section 2036), and pull all assets back into your taxable estate. Respect the formalities.
Mechanic: The Discount Machine
GP (1%)
Total Control
LP (99%)
Passive Equity
-35% Disc
Tax Savings
Lock-In
No Easy Exit
Simulation: Transferring a $10M Portfolio (Direct vs. FLP)
Gift Tax Value Calculation
| Feature | Direct Ownership | Family Limited Partnership (FLP) |
|---|---|---|
| Value of $10M | $10,000,000 | ~$6,500,000 (For Tax Purpose) |
| Child’s Rights | Can sell/spend anytime | Cannot sell/spend (Locked in) |
| Creditor Protection | Zero (Seizable) | High (Charging Order only) |
“The FLP creates a ‘Family Boardroom.’ It forces the next generation to sit together, learn the business, and vote on major decisions, preventing them from treating the family fortune like an ATM.”
Essential Resources
INTERNAL
BMT Playbooks