What we value

  • Real estate ownership interests.
  • Family limited partnerships and limited liability companies.
  • Private notes and loans receivable.
  • Operating companies and related ownership interests.
  • Intangibles including patents, royalties, claims, etc.
Family Limited Partnerships - A Powerful Tool Print E-mail

With a large number of "baby boomers" reaching retirement age, demographics across the country are such that the next decade will see a large shift in family wealth from one generation to the next. As a result, the family limited partnership ("FLP") is gaining wide spread popularity as the vehicle of choice for prudent estate and succession planning professionals. Opportunities exist for substantial gift and estate tax savings in intergenerational wealth transfer transactions if the FLP is properly utilized.


One of the main areas of opportunity lies in using valuation discounts for FLPs in situations where a senior family member contributes assets to a FLP and then subsequently gifts fractional limited partnership interests to younger generation family members. Various factors such as certain provisions in the partnership agreement, the nature of the partnership entity, and the indirect ownership of the partnership’s underlying assets restrict the value of a limited partnership interest. These factors reduce the value of an interest below the interest holder’s proportionate share of the underlying assets of the partnership. These reductions, or valuation discounts, from the proportionate share of the underlying partnership assets reduce the value of the gift for gift tax reporting purposes, resulting in significant gift tax savings. Additionally, if structured properly, the FLP vehicle can remove significant value from the estate of the senior family member, thus potentially reducing the size of the taxable estate upon death. The FLP allows parents to transfer ownership interests to the children (or grandchildren) while still retaining operational control of the assets transferred to the FLP. Further, the FLP can be a useful tool for establishing protection from creditors.

There are many reasons why limited partnership interests are valued below their proportionate share of the value of the underlying assets. The two most recognized and most often used valuation discounts relate to the relative lack of control and the relative lack of marketability/liquidity. There are numerous published studies which can help support the level of valuation discounts associated with these two factors. These studies support valuation discounts from 0% to 80%. Valuation Services, Inc. ("VSI") has a proprietary database of actual purchases of private limited partnership interests which supports valuation discounts ranging from 30% to 77%.

Although the IRS has recently been scrutinizing the use of FLPs, the IRS still recognizes and accepts valuation discounts for limited partnership interests. The planning associated with the formation of the FLP and the terms and wording of the FLP agreement can have a significant impact on (i) the value of a fractional ownership interest, and ultimately (ii) the success in supporting valuation discounts before the IRS.

The use of FLPs is not, however, without its pitfalls. In several recent Technical Advice Memorandums ("TAMs") and court cases, the IRS has expressed its hesitancy to accept the validity of valuation discounts related to FLPs in situations where careful planning and analysis did not proceed the establishment of the FLP. It has therefore become increasingly important to keep the following concepts in mind when establishing an FLP:

  • Formation - Death bed transfers will receive close scrutiny by the IRS.
  • Business Purpose - Careful consideration should be given to the business purpose of the FLP.
  • Integrity, Nature, and Character - Always maintain the integrity, nature, and character of the FLP entity structure.
  • Conflict with State Law - Research and comply with the applicable state law in the jurisdiction where the FLP is to be created.

Despite the close inspection FLPs have received from the IRS, the FLP is still a very powerful tool in gift and estate tax planning. Valuation discounts can save significant tax dollars. In a recent tax court case, VSI was successful in obtaining a valuation discount of nearly 50% for a limited partner interest in a FLP. The key to success in any succession or gifting plan is careful analysis of the facts and advanced planning. An important concept to keep in mind is not to be too greedy.

As business valuation experts, VSI has reviewed numerous FLP agreements and valued hundreds of fractional interests in FLPs. VSI is here to help. We are keeping an Eye on the IRS in order to help you protect your family’s assets.