Family Limited Partnerships and Family LLCs in High Net-Worth Estate Plans

Once a family’s wealth grows past a certain point, a will and a revocable trust start to feel like only part of the picture. If you own a business, a portfolio of rental properties, or a farm that has been in the family for generations, the goal is usually not just to transfer the assets but to keep them working as one unit instead of splintering into a dozen separately managed pieces once the next generation inherits. Family limited partnerships and family limited liability companies are two of the most common tools for that, and while they are often mentioned together, they come with real differences and real risks if the paperwork does not match how the family actually behaves. For guidance on whether either structure fits your situation, contact a Bronx high net worth estate planning attorney.

What These Structures Actually Do

In a family limited partnership, parents or grandparents typically contribute business interests, real estate, or investment accounts in exchange for general and limited partnership interests. The general partner keeps management control, while limited partnership interests, which carry little to no control, are gradually gifted or sold to children and grandchildren. A family LLC works similarly, through a limited liability company rather than a partnership, and it offers members liability protection that a general partnership interest does not. Both structures let the older generation move economic value out of their taxable estate while keeping day-to-day control in their own hands for as long as they choose.

The Valuation Discount, and Why the IRS Watches Closely

One of the most attractive features of these entities is the valuation discount. Because a limited partnership or LLC interest cannot be sold or controlled the way an outright ownership stake can, appraisers often value it at less than its proportional share of the underlying assets, sometimes significantly less. That discount can meaningfully reduce the value of a taxable gift or estate. It is also exactly what the Internal Revenue Service scrutinizes most closely. Under 26 U.S.C. Section 2036, if a decedent is found to have retained effective enjoyment or control over transferred assets, the full value of those assets can be pulled back into the taxable estate, discount and all. Whether a structure holds up often comes down to whether the family treated the entity as a real business arrangement or as a formality that changed nothing in practice.

Getting the Details Right From the Start

Courts examining these arrangements look at whether the family kept separate books and accounts, whether distributions went out proportionally to actual ownership, and whether the older generation kept using entity funds or entity-owned property as though it were still personal money. None of that makes family limited partnerships or family LLCs unusable. It means the operating agreement, the funding, and the ongoing administration all need to reflect a genuine business purpose, not an estate tax strategy layered on top of business as usual.

Building an Entity That Holds Up

These structures reward careful planning far more than they punish an honest mistake, but the two outcomes can look similar to a court years later if the paperwork was never done properly. We work with business owners and families across a range of asset types to structure partnerships and LLCs that reflect how the family actually intends to operate, not just what looks good on paper. Contact Cavallo & Cavallo to speak with a Bronx high net worth estate planning attorney about whether a family limited partnership or family LLC belongs in your plan.

Source:

law.cornell.edu/uscode/text/26/2036