Creating a Family Limited Partnership as Part of Your Texas Estate Plan
Estate planning can become more complex when a family owns a business, investment properties, real estate, or other significant assets that they want to preserve for future generations.
For some Texas families, a family limited partnership (FLP) may be one tool to consider as part of a broader estate and business succession plan.
A limited partnership can provide a structure for consolidating family assets, defining management responsibilities, and gradually transferring partnership interests to children or other family members. However, forming a partnership is not simply a matter of moving property into a new entity. The partnership must have a legitimate purpose, be properly structured, and coordinate with the family's broader legal and tax strategy.
What Is a Limited Partnership in Texas?
Under the Texas Business Organizations Code, a limited partnership generally consists of one or more general partners and one or more limited partners.
The roles are different.
A general partner generally has responsibility for managing the partnership. A limited partner owns a partnership interest but may have different rights and responsibilities based on Texas law and the partnership agreement.
For estate planning purposes, families sometimes use this structure to hold assets such as:
Family businesses
Investment assets
Commercial property
Rental real estate
Other family-owned assets
Instead of family members directly owning portions of each underlying asset, they may own interests in the partnership.
This can create a more organized framework for managing and eventually transferring family wealth.
How Can a Family Limited Partnership Fit Into an Estate Plan?
Consider parents who own several investment properties.
Instead of eventually leaving separate pieces of real estate to several children, the parents might establish a family limited partnership and contribute appropriate assets to it.
The partnership could then own the properties while family members hold partnership interests.
Depending on how the partnership is structured, the parents may retain management responsibilities as general partners while gradually transferring limited partnership interests to the next generation.
That distinction can be valuable for families who want to begin transferring wealth without immediately dividing or transferring control of individual assets.
For families already considering lifetime transfers, our article on how gift taxes can impact a high-asset estate planexplains why gifting should be coordinated with the broader estate and tax strategy.
Maintaining a Structure for Family Asset Management
One potential advantage of a family limited partnership is centralized management.
Suppose a family owns multiple rental properties. Leaving individual properties outright to several beneficiaries could eventually result in multiple owners making decisions about maintenance, leases, financing, or whether property should be sold.
A partnership can instead establish rules governing how those assets are managed.
The partnership agreement may address matters such as:
Management authority
Voting rights
Distributions
Transfers of partnership interests
Admission of new partners
What happens after the death or incapacity of a partner
This can be particularly relevant for business owners and families who want assets to remain managed together rather than divided immediately after death.
Hyde Legal Group already discusses the importance of revisiting an estate plan when a person starts a business or experiences significant financial changes in When Should You Update Your Estate Plan?.
Transferring Partnership Interests to the Next Generation
An FLP can also provide a mechanism for transferring wealth during a person's lifetime.
Rather than giving an adult child a particular property, for example, a parent might transfer a limited partnership interest.
Those transfers can have gift and estate tax consequences, so they should be carefully valued and documented.
For families with substantial assets, this is particularly important because federal gift and estate tax rules can affect how lifetime transfers are reported and ultimately treated for tax purposes.
An FLP should therefore not be created simply because a family wants to transfer assets at a lower reported value.
What About Valuation Discounts?
This is one area where the original article needs more careful wording.
A noncontrolling interest in a closely held entity may, under appropriate circumstances, be valued differently from a controlling interest because factors such as lack of control or lack of marketability can affect fair market value.
However, valuation discounts are not automatic simply because assets have been placed in a family limited partnership.
The IRS has scrutinized partnership transactions and valuation discounts in the estate-tax context, and the appropriate valuation depends on the actual facts, ownership rights, restrictions, and applicable federal tax law.
Families considering substantial transfers should therefore coordinate legal planning with qualified tax and valuation professionals.
Does a Limited Partnership Provide Asset Protection?
A properly structured entity can provide liability-planning benefits, but this should also be described carefully.
A family should not assume that simply transferring an asset into an LP makes the asset immune from every creditor or legal claim.
Liability can depend on:
Whether someone is a general or limited partner
How the entity is structured
The source of a particular liability
How the partnership is operated
Whether business and personal assets are properly separated
Other applicable Texas law
Texas also permits a limited partnership to register as a limited liability partnership if statutory requirements are satisfied, which can further affect the liability analysis.
Asset-protection planning therefore needs to be evaluated based on the family's specific circumstances rather than treated as a guaranteed benefit of forming an LP.
How Does an FLP Compare With a Trust?
A family limited partnership and a trust are different legal tools.
A partnership can be particularly useful for owning and managing family assets or business interests, while a trust can establish how assets are managed and distributed for beneficiaries.
Some estate plans may use one structure. Others may use both.
For example, a family might have an FLP that owns investment properties while certain partnership interests are ultimately coordinated with a trust-based estate plan.
If you're exploring trust planning, see Living Trust vs. Testamentary Trust in Texas – Key Differences.
For families considering more advanced asset and tax planning, What Is an Irrevocable Trust and When Does It Make Sense for Your Estate Plan? provides another useful comparison.
A Family Limited Partnership Isn't Right for Every Estate
An FLP adds another legal entity to a family's financial life.
That means there can be additional:
Formation requirements
Tax filings
Recordkeeping
Accounting
Partnership administration
Legal expenses
Valuation considerations
For someone with a relatively straightforward estate, a will, trust, beneficiary designations, and other traditional estate-planning tools may accomplish the intended goals without creating a partnership.
Related reading: Three Estate Planning Strategies to Keep Assets Out of an Estate.
Coordinate Business and Estate Planning
For business owners and families with substantial assets, estate planning should address more than who receives property after death.
The plan may also need to determine:
Who will control family assets
Whether a business should continue
How ownership interests should transfer
Whether children should participate in management
How family wealth should be distributed
How lifetime gifts fit into the strategy
How trusts and business entities work together
That makes an FLP less of a standalone “estate planning product” and more of one possible component within a coordinated business, tax, and legacy strategy.
Hyde Legal Group advises Texas families and business owners on estate planning, trusts, legacy planning, and business formation.
Is a Family Limited Partnership Right for Your Estate Plan?
A family limited partnership can provide a useful framework for families who need to manage substantial or complex assets across generations.
But the benefits depend heavily on why the partnership is being created, what assets it owns, how it operates, and how ownership interests are transferred.
Before forming an FLP, consider how the partnership would work alongside your will, trusts, powers of attorney, tax strategy, and long-term plans for your family or business.
Hyde Legal Group helps Texas individuals, families, and business owners evaluate estate-planning and business structures based on their assets and long-term goals.
Contact Hyde Legal Group to discuss whether a family limited partnership or another planning strategy may be appropriate for your estate.
