Family Limited Partnerships ("FLPs") are a popular tool for estate planning. FLPs protect assets, centralize control, and facilitate the transfer of wealth to the next generation with minimum tax effect. When structured properly, the lack of marketability and illiquidity of limited partnership interests results in their being valued less than if the assets were valued separately. This is referred to as a “discount.” The use of the FLP vehicle combined with discounting can significantly reduce the estate and gift tax on asset transfers between family members. We consider the following factors in determining the fair market value of a family limited partnership:
- Lack of Liquidity - Limited partners cannot force the liquidation of the partnership assets to recover their investment.
- Lack of marketability - These partnership interests are generally not transferable, and cannot be bought or sold as easily as equity that is regularly traded on a public market.
- Lack of control - General partners control the partnership's day-to-day operations and make decisions that have a significant impact on a partnership's financial performance. Limited partners have little, if any, influence on these decisions.
- Cash flow taxation - Limited partnerships potentially generate income tax liabilities that are payable by the partners. Because a partnership may not distribute adequate income to pay the taxes incurred, limited partners may not receive distributions sufficient to satisfy income tax liabilities resulting from their ownership of limited partnership interests.