A partnership is an association of two or more persons carrying on a business for profit. While the entity is distinct from the partners for liability purposes, the business is not a separately taxed. A partnership acts as a conduit where the profit or losses of the partnership flow through to the partners.

Family Limited Partnerships

A family limited partnership is a business partnership in which all of the partners are related. As with a general limited partnership, family limited partnerships are made up of one or more general partners and one or more limited partners. This entity allows a parent to be a general partner and maintain control over the assets and businesses, as well as gift their children significant ownership interests as limited partners. If the parent gifts partnership interests valued at the annual exclusion amount there will be no gift tax consequences.

Discounts are another advantage of family limited partnerships. Valuation discounts are generally afforded when something about the business or property makes it worth less than fair market value. Because of the limited marketability of family limited partnerships and the limited control of the limited partners, family limited partnerships are great candidates for valuation discounts for gift and estate tax purposes. However, the Internal Revenue Service has been fairly skeptical about some of the discounts applied to family limited partnerships. It would be advisable to obtain a valuation from a reputable valuator before attempting to include discounts of any kind.