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What are Family Limited Partnership?

Family Limited Partnership

A family limited partnership is a type of limited partnership formed among family members, generally for the purposes of tax avoidance. A family limited partnership would allow family members to protect their income from income taxes and would also enable a family to avoid estate taxes.

The protection from income taxes provided by a family limited partnership comes as a result of the ability of family members within a family limited partnership to shift money from those individuals in the family limited partnership who are in a high tax bracket to those who are in a low tax bracket.

For example, money could be shifted in the family limited partnership from a parent to a youth of 14 years of age or older, as the parent would almost certainly be in a greater tax bracket. This transfer of funds between the two members of the family limited partnership shows the possibilities of a family limited partnership in terms of transferring estates, as well.

A family limited partnership is akin to business partnerships of the limited variety. These business partnerships would involve one partner at least having general liability to the partnership, while all the other partners would have limited liability. As such, these business partnerships would generally have one (or more) active partners along with fewer passive parties with limited liability.

This model of business partnerships functions in a family limited partnership, wherein a single member of the family, such a parent, might have the general liability and thus control of the family limited partnership, while the younger members of the family might have limited liability. The family limited partnership might then simply set up rules for how ownership is transferred to the other members.

NEXT: What are Master Limited Partnerships?

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