How to Use a Family Limited Partnership for Estate Planning in Texas

If you own a family business, rental properties, or a portfolio of investments, you have probably been told at some point that a family limited partnership could help with your estate plan. And that advice is not wrong. But a family limited partnership in Texas is not a simple tool, and it is not the right fit for every family.

When structured correctly, a family limited partnership can reduce estate taxes, protect assets from creditors, and give you a way to transfer wealth to your children and grandchildren while keeping control of the assets during your lifetime. When structured poorly, it becomes an expensive target for IRS scrutiny.

What Is a Family Limited Partnership?

A family limited partnership (FLP) is a business entity made up of two types of partners: general partners and limited partners.

In a family context, the parents or senior family members typically serve as general partners, while children or younger generations hold limited partnership interests.

• The general partner manages the partnership and makes all decisions about the assets.
• The limited partners have ownership stakes but no management authority.

This structure allows the senior generation to transfer ownership to the next generation gradually while retaining control over how the assets are managed.

FLPs are recognized under Texas law as standard limited partnerships. The Texas Business Organizations Code governs how they are formed and operated. What makes them “family” limited partnerships is simply that the partners are related.

How Does an FLP Help With Estate Planning?

The estate planning benefits of a family limited partnership come down to three things: control, tax efficiency, and asset protection.

1. Control. As the general partner, you decide how assets are invested, when distributions are made, and what happens if a limited partner wants to sell their interest. You can hold as little as 1-2% of the total value of the partnership and still run the entire operation.
2. Tax efficiency. When you gift limited partnership interests to your children or grandchildren, those interests are typically valued at less than the underlying assets would be worth on their own.

This is because limited partners have no management control and cannot easily sell their interests on the open market. The IRS allows valuation discounts for lack of marketability and lack of control, which can reduce the taxable value of the gift by 15% to 40%, depending on the circumstances.

With the 2026 federal estate tax exemption at $15 million per individual ($30 million for married couples), many families will not owe federal estate tax. But for those whose combined assets exceed the exemption, gifting discounted FLP interests over time can be a powerful way to transfer wealth.

1. Asset protection. Assets inside the FLP belong to the partnership, not to the individual partners. If a limited partner faces a lawsuit, divorce, or creditor claim, the creditor generally cannot seize the partnership assets directly.

In most cases, the creditor is limited to a “charging order,” which only entitles them to receive distributions if and when the general partner decides to make them.

What Types of Assets Work Best in an FLP?

FLPs are most commonly used for:

• Real estate holdings, including rental properties and undeveloped land
• Investment portfolios, such as stocks, bonds, and mutual funds
• Family business interests
• Oil, gas, and mineral rights

The key requirement is that the FLP must serve a legitimate business purpose beyond just saving on taxes. The IRS has successfully challenged FLPs that were created solely as tax avoidance vehicles with no real business operations.

Your partnership needs to have genuine economic activity, maintain proper records, file annual tax returns, and keep partnership finances separate from personal finances.

What Are the Risks and Downsides?

FLPs are powerful, but they are not without risk:

• IRS scrutiny. The IRS has a history of challenging valuation discounts on FLP interests. If the partnership was not set up correctly or does not operate as a real business, the IRS can disallow the discounts and include the assets in the general partner’s taxable estate.
• Cost and complexity. Setting up an FLP typically costs $8,000 to $15,000 or more, depending on the complexity of the assets involved. There are also ongoing costs for tax return preparation, appraisals, and legal maintenance.
• Loss of flexibility. Once assets are transferred into the FLP, they belong to the partnership. You cannot treat partnership assets as personal property without jeopardizing the entire structure.
• Family dynamics. FLPs require cooperation among family members. If relationships deteriorate, disputes over management decisions or distributions can become contentious.

Working with an experienced estate planning attorney and a CPA is essential. This is not a do-it-yourself project.

How Do You Set Up a Family Limited Partnership in Texas?

The process involves several steps:

• Form the general partner entity. This is usually an LLC or corporation that the senior family members control.
• Draft the limited partnership agreement. This is the governing document that spells out management authority, distribution rules, transfer restrictions, and what happens when a partner dies or becomes incapacitated.
• File a Certificate of Formation with the Texas Secretary of State under the Texas Business Organizations Code.
• Fund the partnership. Transfer assets into the FLP. This is where proper documentation and appraisals become critical.
• Begin gifting limited partnership interests. Over time, the general partners can gift limited partnership interests to family members, using the annual gift tax exclusion ($19,000 per recipient in 2026) and the lifetime exemption.

Each of these steps needs to be done carefully and in the right order. Mistakes in formation or funding can undermine the entire structure.

Should You Use an FLP or a Trust Instead?

Many families ask whether they need an FLP, a trust, or both. The answer depends on your goals.

An FLP is better suited for families who want to consolidate and manage assets as a business while gradually transferring ownership.

A trust is better suited for families who want to remove assets from their estate entirely and set specific conditions on how and when beneficiaries receive them.

In practice, the most effective estate plans for high-net-worth families often use both. The FLP holds the assets, and the limited partnership interests are owned by trusts for the benefit of the next generation. This layered approach combines the control and discount benefits of the FLP with the asset protection and distribution controls of the trust.

How We Help Houston Families With Family Limited Partnerships

At Your Legacy Legal Care®, our asset protection attorneys work with families across the Greater Houston area to determine whether an FLP makes sense for their situation.

We have been recognized as Best Trust & Estate Law Firm by the Houston Chronicle, and our team works on a flat fee basis so you know the cost upfront. If you are considering an FLP or want to evaluate whether your current structure is solid, schedule a strategy session with our team.

Key Takeaways:

• A family limited partnership lets you transfer wealth to the next generation while retaining management control over the assets.
• Valuation discounts for lack of marketability and lack of control can reduce the taxable value of gifted partnership interests.
• The IRS scrutinizes FLPs closely. The partnership must serve a legitimate business purpose and operate as a real entity.
• FLPs are most effective when combined with trusts as part of a comprehensive estate plan.
• Setup costs and ongoing maintenance are significant, so FLPs are best suited for families with substantial assets to protect.

Related Resources from Your Legacy Legal Care®

• Asset Protection
• Business Succession Planning
• Trusts
• Estate Planning Assessment (Free)