A family limited partnership (FLP) is a popular estate planning tool that you can use to transfer business or investment interests to family members (usually children) during your lifetime, and thereby lower your income and estate taxes.

According to Houston Financial Advisors Richard J. Alphonso, JD, CPA, M.S.T., and C. Randy Scott, CPA., an FLP consists of one or more general partners (GPs), and one or more limited partners (LPs).

GPs (which can be you and your spouse) make all management decisions and bear liability for all legal claims levied against the partnership. LPs (your children, perhaps) can own as much as 99% of the total value. However, they don’t participate in management and aren’t usually responsible for the obligations of the partnership. They’re liable only to the extent of their investment in the partnership.

Because the partnership agreement often limits the rights of LPs to transfer or liquidate their interests, the value of a gift to an LP is often reduced by a valuation discount. This reduces the fair market value of the asset and thereby reduces estate taxes.