Differences Between a Family Limited Partnership vs. Trust

Family limited partnerships (FLPs) and trusts are both tools used in estate planning, but they serve different purposes and offer distinct advantages. An FLP is primarily designed to hold and manage family-owned assets while providing potential tax benefits and asset protection. It also enables parents to transfer wealth to their children while retaining some control over the assets. A trust is a legal arrangement where a trustee manages assets on behalf of beneficiaries, offering flexibility in how assets are distributed. Each of these estate planning tools has unique advantages and disadvantages.

There’s a lot to consider when creating your estate plan. For professional help and tailored advice, consult a financial advisor.

How Does a Family Limited Partnership Work?

A family limited partnership (FLP) is a legal entity used in estate planning to manage, transfer and protect family assets. Family members can form an FLP, with one or more individuals serving as general partners who control the management and decision-making of the partnership. Other family members act as limited partners with ownership interests but limited control.

This structure allows the general partners to retain control over the assets while gradually transferring ownership to the next generation, often in a tax-efficient way. The assets within an FLP can include real estate, investments or family businesses, making it a versatile tool for preserving and managing family wealth.

General vs. Limited Partners

The operation of an FLP revolves around the distinction between general and limited partners.

General partners have full control over the daily operations and decision-making processes of the partnership.
Limited partners, on the other hand, have a passive role, with their involvement largely restricted to their investment in the partnership.

This setup not only allows the senior generation to maintain control over the family assets but also provides a mechanism for teaching the younger generation about managing and preserving wealth. Because the limited partners’ interests in the FLP can be transferred over time, this structure also offers a way to minimize estate and gift taxes through the use of valuation discounts on the transferred interests.

How Does a Trust Work?

Trusts can be either revocable or irrevocable. The distinction between them is significant.

A revocable trust, also known as a living trust, allows the grantor to retain control over the trust and its assets during their lifetime, with the ability to alter or dissolve the trust if circumstances change. An irrevocable trust, on the other hand, cannot be modified or revoked once it’s established, which can offer additional tax benefits and asset protection.

When the grantor of a revocable trust dies, the trust becomes irrevocable. From that point on, the trustee is responsible for managing and distributing the assets according to the grantor’s wishes. The grantor may name one or more successor trustees to carry on this role if the original trustee passes away or steps down from their duties.

Role of the Trustee

The operation of a trust involves the trustee managing the assets for the benefit of the beneficiaries, who can be individuals, charities or other entities. The trustee must follow the specific instructions laid out in the trust document, which can include when and how the assets should be distributed, conditions for beneficiaries to receive their inheritance and how the assets should be invested.

This level of control allows the grantor to make sure their assets are used in a way that aligns with their wishes. Since the trustee is a fiduciary, they’re obligated to carry out your wishes. A trustee can be removed from the administration of a trust if a breach of fiduciary duty is suspected or occurs.

Family Limited Partnership vs. Trust: Key Differences

A revocable trust can be an effective estate planning tool.

Understanding the distinctions between a family limited partnership and a trust can help you determine which option is best suited for your family’s financial goals and estate planning needs. Here are some of the key differences to note.

Ownership structure: FLPs involve partners, where general partners manage the assets and limited partners have ownership interest without control. Trusts, on the other hand, are managed by a trustee on behalf of one or more beneficiaries.
Control: In an FLP, general partners retain control over the assets, making key decisions. With a trust, the trustee holds control and manages assets according to the trust’s terms.
Tax benefits: Both FLPs and trusts offer tax advantages, but FLPs may provide more opportunities for income and estate tax planning, particularly in gifting shares to heirs at discounted values.
Asset protection: Trusts often offer stronger asset protection by placing assets beyond the reach of creditors. FLPs offer some protection, but general partners’ assets may be exposed to liability.
Estate planning flexibility: Trusts are generally more flexible for estate planning, allowing detailed distribution plans, whereas FLPs focus more on asset management and gradual wealth transfer.

How to Choose Between a Family Limited Partnership and a Trust

Choosing between an FLP and a trust depends on your specific goals for asset management, control and tax planning.

Families who want to maintain control over their assets while gradually transferring ownership to the next generation may prefer an FLP. This structure allows general partners to manage the assets and make changes to the agreement. FLPs are particularly beneficial for families with significant assets like real estate or family businesses, as they can offer protection from creditors and facilitate wealth transfer with reduced gift and estate taxes.

On the other hand, a trust is ideal for those who prioritize privacy, control over asset distribution and avoiding probate. You can tailor a trust to meet specific needs, whether it’s providing for minor children, supporting a charitable cause or ensuring a loved one’s financial security.

Trusts offer more flexibility in terms of how and when assets are distributed, and they can be structured to minimize estate taxes. Trusts are also a key tool for maintaining control over how your assets are used after your death, making them a potentially good choice for those who want to make sure their wealth is managed according to their wishes.

Using FLPs and Trusts Together

Families do not always have to choose between a family limited partnership and a trust. In many cases, these two tools are used together to balance control, tax efficiency and asset protection. An FLP is often used to consolidate and manage family-owned assets such as real estate, investments or a family business. At the same time, a trust can hold the partnership interests, dictating how those interests are transferred to heirs and how distributions are made over time.

Here’s an example of what that might look like:

Parents may establish an FLP to manage a rental property portfolio and then transfer limited partnership shares into an irrevocable trust for their children.
The parents, as general partners, maintain control over the property decisions while gradually shifting ownership to the next generation.
Meanwhile, the trust ensures that the children receive the economic benefits of the FLP according to clear rules, such as when distributions are made or under what conditions the assets can be sold.

This combination also enhances asset protection. The FLP structure makes it harder for outside creditors to access underlying assets directly, while the trust adds another barrier by controlling how partnership interests can be assigned or distributed. Together, they can provide a strong framework for preserving family wealth across multiple generations.

Because layering an FLP and a trust creates complexity, it requires careful drafting and coordination. Tax rules, valuation discounts and fiduciary duties must all be considered to ensure that the arrangement delivers the intended benefits. For families with significant assets, using both structures in tandem can offer a powerful way to manage wealth while maintaining long-term control and flexibility.

Bottom Line

A wealthy family has dinner after making a critical decision to form a family limited partnership over a trust.

Both family limited partnerships and trusts serve valuable roles in estate planning, but they cater to different needs. FLPs are ideal for families looking to maintain control over their assets while gradually transferring wealth to the next generation. Trusts, on the other hand, provide more flexibility in asset distribution, privacy and the ability to avoid probate. Ultimately, deciding between an FLP and a trust should be based on your family’s unique circumstances and goals.

Estate Planning Tips

A charitable remainder trust allows you to donate assets to a charitable organization while still receiving income from those assets during your lifetime. You get an immediate tax deduction for the donation, and upon your passing, the remainder of the trust is given to the charity. CRTs can be an effective way to reduce your estate size, lower capital gains taxes and leave a legacy with charitable giving.
Estate planning can be complicated and mistakes made during this process can have significant consequences down the road. A financial advisor with estate planning expertise can help you decide how to structure your estate and plan for future generations. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.