Family limited partnerships ("FLP") are used as a method of owning either businesses or personal securities portfolios. The use of FLP's has spread because it enables the original owners of the property (typically the parents) to discount other value of the assets in the FLP, give minority interests away (typically to the children) at a discounted value without necessarily giving the income attributable to the property. Ultimately, estate taxes are reduced on the value of the assets in the partnership due to the gifts and discounts claimed, even if the assets are publicly traded securities. FLP's also offer unique protection from the potential claims of creditors who may be unable to reach the interest of the limited partners of the FLP.

A family limited partnership would continue to provide you with the same use and enjoyment that you now have, but potentially enables your estate to discount the value of the underlying securities by approximately 20%. There is no guarantee that a family limited partnership would accomplish such a dramatic savings, but there is no risk in establishing it. In addition, the potential estate tax discount would be available regardless of when you pass away. If it is established and if you own less than 50% of the partnership, then the discount in theory would be immediately available to your estate.

With respect to the family limited partnership, the partnership agreement is the governing document controlling the allocation of income and deductions, as well as imposing restrictions on the disposition of property from the partnership. You can transfer your investments to the family limited partnership, in which you will serve as a general partner and in which your children will become limited partners. The transfer of the property to the partnership will not have any adverse income tax consequences to you, but the effect of the limited partnership agreement should eventually save considerable estate taxes because a partner's ability to transfer his or her interest in the partnership will be restricted under the partnership agreement and, as a consequence, will be less valuable for estate tax purposes. Over time, interest in the limited partnership can be given to your children without giving them access to or control over the property in the partnership. However, by placing your investments into the partnership and entering into a partnership agreement, you will be able to discount the value of these investments for estate tax purposes. This arises from a partner's inability to freely dispose of his or her limited partnership interest. This impacts the children more than it does you, because as a general partner, you can easily waive the restrictions. However, since they are contained in the agreement, they do create an estate tax discount on the assets in the partnership. It would be reasonable to expect a discount of more than 20% on the value of the partnership assets.

Over time, as you transfer limited partnership interest to your children, they will share ownership interest in the enterprise with you. There is no precise formula for determining how much of a discount would be available when valuing a limited partnership interest in your estate. Some of the factors that come into play are the limitations that are imposed upon the transfer of a limited partnership interest to another, even someone that is already a limited partner (i.e., the consent of a general partner is needed for the transfer). Another element in determining the discount is that members of the family can eventually have a minority interest. A minority ownership of a partnership offers an additional discount.

There is nothing to lose in using the Family Limited Partnership since you need not sacrifice any income or control over the assets. However, the Family Limited Partnership could provide you with significant estate tax savings.