A family limited partnership is an entity a family uses to hold investment assets, usually rental real estate or a securities portfolio, with the parents in control and the children holding interests that carry no control. Its modern form is often a family LLC, which does the same work under chapter 605 without a general partner who is personally liable. This page is about what the structure does, what it costs, and why most families should not have one.
The structure centralizes management and separates control from value
Under chapter 620 of the Florida Statutes, a limited partnership has a general partner, who manages and is liable for the partnership’s debts, and limited partners, who do neither. The parents, or an LLC the parents control, serve as general partner. The children, or trusts for them, hold limited partnership interests. In the LLC version, the parents are managers and the children hold non-voting interests. Either way the family’s assets sit in one entity, with one set of books and one manager. For a family with several rental properties and several children, that alone has value: The properties are not split into undivided fractions, and a child who wants out has an interest to sell rather than a house to partition.
The tax benefit is a valuation discount, and the IRS watches it
A limited partnership interest is worth less than its share of the underlying assets, because the holder cannot control the partnership and cannot readily sell the interest. Appraisers quantify those two facts as discounts for lack of control and lack of marketability, and the discounts reduce the value of a gift or an estate for federal transfer tax purposes. That is the estate planning reason the structure exists.
The Internal Revenue Service scrutinizes it closely. Where the parents keep using the partnership’s assets as their own, pay personal expenses from it, put their home into it, take distributions that do not match their interests, or keep the power to unwind the partnership, the Tax Court has brought the entire partnership back into the parent’s taxable estate. Estate of Powell v. Commissioner (2017) is one example among many. The discount survives only where the partnership is real: a business purpose beyond tax, a qualified appraisal, assets the parents can afford to part with, and formalities observed every year.
The creditor protection is the charging order
A creditor of a limited partner, or of a member of a multi-member LLC, is generally limited to a charging order against distributions and cannot reach the partnership’s assets or force a sale. That is real protection for the family’s investment assets, as long as the transfer into the entity was not made to defeat an existing creditor; chapter 726 undoes a transfer made for that purpose. It is not protection against the partnership’s own liabilities, which is why rental property inside the entity still needs insurance. The asset protection page puts it beside Florida’s other protections.
The costs are larger than the brochure version admits
Forming the entity takes Spiro Verras’s time and your CPA’s. He has practiced law since 1993 and drafts the agreement himself; the formalities that keep the discount alive are written into it from the start. A qualified appraisal is required at formation and again at each gift of interests. Every year the entity files an annual report with the Florida Division of Corporations, files a partnership income tax return, and issues a schedule to each partner. It needs its own bank accounts and its own books, and distributions must be made in proportion to the interests, with no personal use of partnership assets by anyone.
Then there is control. An interest given to a child cannot be taken back. It belongs to the child, and so it belongs to the child’s creditors and, if the child’s marriage ends, is at least a subject of discussion. A gifted interest does not receive a new income tax basis at the parent’s death, so the discount that saved estate tax can cost capital gains tax later. And if the family stops observing the formalities, the entity is disregarded: The discount disappears and the assets return to the estate.
A few families should consider one, and most should not
The family that should consider a family limited partnership or family LLC has substantial rental real estate or investment assets, an estate likely to exceed the federal exclusion of $15,000,000 per person, or $30,000,000 for a married couple who use portability, a genuine reason beyond tax to manage the assets together, and the willingness to run the entity properly for decades.
Most families do not fit that description. Florida has no estate tax, and the federal exclusion now covers nearly everyone. For a family below it, a revocable trust holding a plain limited liability company for the rental property provides the continuity, the probate avoidance, and the liability shield at a fraction of the cost, with no appraisals, no discounts to defend, and a full basis step-up at death. When a client asks Spiro Verras about a family limited partnership, that is usually what he recommends instead. Either way, you will leave with a structure sized to your family, and we will record the deeds and help with the retitling. The other techniques in this category are collected under advanced estate planning techniques, and the entity side under business law.
The next step is the questionnaire, followed by an hour with Spiro Verras in Palm Harbor, or by appointment in Tampa or St. Petersburg.