Family Limited Partnership Estate Planning: 2026 Law and Cases

What an FLP is in law: a state limited partnership with family partners

There is no federal statute called “family limited partnership.” The entity is a limited partnership under the law of the state where it is formed, and the family part is only who owns it. The usual structure (our reading of the statutes below): parents, or an entity they own, are the general partner and run it; the property (rental buildings, land, a business interest, a securities portfolio) is contributed in exchange for partnership interests; the parents then give or sell limited partner interests to children or trusts over time.

The Uniform Law Commission says plainly who its current act is for. The prefatory note to the Uniform Limited Partnership Act (2001, last amended 2013) says the act targets “sophisticated, manager-entrenched commercial deals” and “estate planning arrangements (family limited partnerships)”, and that users will want passive investors “with little control over or right to exit the entity.” Three state-law rules do the work:

These rules matter twice. They are the non-tax reasons families give (centralized management, keeping a building in one piece, limits on what a child’s creditor can reach), and they are the facts an appraiser uses to justify a discount. The uniform act’s own comment notes that “several States have amended RULPA to prohibit limited partner withdrawal unless otherwise provided in the partnership agreement” because of estate planning concerns. The tax reason is in 26 U.S.C. 2704(b)(3)(B), below: a restriction “imposed, or required to be imposed, by any Federal or State law” is not disregarded (our reading of why states changed their defaults).

Gifts of limited partner interests are gifts of property, valued “at the date of the gift” (26 U.S.C. 2512(a)). The annual exclusion of section 2503(b) covers only gifts “other than gifts of future interests in property”, and for 2026 it is $19,000 per donee (Rev. Proc. 2025-32). Whether a gift of an LP or LLC interest is a present interest depends on the agreement; in T.C. Memo. 2015-249 the Tax Court held that gifts of interests in a family LLC holding securities and a share of a commercial building were present-interest gifts that qualify for exclusion under section 2503(b). Gifts above the exclusion are reported on Form 709.

The federal tax rules, word for word

The discount is a valuation question; the inclusion is a statutory one. These are the provisions that decide both.

Chapter 14 (sections 2701 to 2704) was added by Public Law 101-508 on November 5, 1990, and section 2703 reaches agreements “entered into (or substantially modified after) October 8, 1990” (26 CFR 20.2031-3). Under 26 CFR 25.2703-1(b)(3), a restriction is treated as meeting the three tests if more than 50 percent by value of the property is owned by people outside the transferor’s family, which a family partnership by definition does not have. A correction to the premise we started from: the valuation regulation for partnership interests is 26 CFR 20.2031-3; section 20.2031-2 covers stocks and bonds.

Revenue Ruling 59-60, the IRS’s list of valuation factors for closely held businesses, is cited by Treasury itself as “Rev. Rul. 59-60, 1959-1 C.B. 237” in the 2016 proposal. It and Revenue Ruling 93-12 (1993-1 C.B. 202, on aggregating family holdings when deciding whether a transferred block is a minority interest) predate the online Internal Revenue Bulletin, and we did not find an official IRS copy of either, so we do not quote them.

The bona fide sale test: what the Tax Court asks

Section 2036 says nothing about “nontax reasons”; that test comes from the cases. The Tax Court stated it in a 2005 reported opinion (124 T.C. 95): “In the context of family limited partnerships, the bona fide sale for adequate and full consideration exception is met where the record establishes the existence of a legitimate and significant nontax reason for creating the family limited partnership, and the transferors received partnership interests proportionate to the value of the property transferred.” It added: “A significant purpose must be an actual motivation, not a theoretical justification.” The court also applies the Fifth Circuit’s 2004 decision at 371 F.3d 257, under which, it says, “we focus on three things” (T.C. Memo. 2011-259).

The facts that sank estates in the opinions we read, in the court’s own terms: standing on both sides of the transaction, financial dependence on partnership distributions, commingling of partnership and personal funds, and failure to actually transfer the property (T.C. Memo. 2016-183, quoting earlier cases); a partnership that was “a mere collection of mostly passive” assets (T.C. Memo. 2007-107); transactions “not at arm's length” and a partnership that “failed to follow the most basic of partnership formalities” (T.C. Memo. 2011-259); and timing, as in T.C. Memo. 2020-40, where the planning began after the owner entered hospice care, and T.C. Memo. 2024-90, where the two valuation dates around funding and death were 27 days apart.

The case record: 18 Tax Court estate opinions and one gift case

The table lists the opinions we read in full from the Tax Court’s own opinion database (ustaxcourt.gov), found by searching it for “family limited partnership” with “bona fide sale,” plus one court of appeals gift-tax decision. It is a selection, not every FLP case decided. Following our editorial rule, cases are listed by official citation only.

Our tally of the 18 estate opinions: 11 for the IRS, 6 for the estate, 1 split (our count). The estates that won had something the court could see besides tax: a concentrated stock position or investment strategy to hold together (133 T.C. 340, T.C. Memo. 2005-126), joint management by the next generation (T.C. Memo. 2008-74), or property management and equal treatment of children with formalities respected (T.C. Memo. 2012-73).

When the IRS wins, the discount is gone

The most expensive misunderstanding is that losing a 2036 case means a smaller discount. It means none on the assets pulled back. T.C. Memo. 2011-209: “Because section 2036 includes in a decedent's gross estate the fair market value of the transferred property”, meaning the underlying assets, “no discount for lack of control or lack of marketability is appropriate.”

The 2024 case shows the size of the swing. The estate’s appraiser valued the limited partner interest “at about $10.8 million”, reflecting roughly $17 million of contributed assets “less a 15% discount for lack of control and a 25% discount for lack of marketability.” The court concluded the transfers “were not bona fide,” found the date-of-death value of the transferred assets to be $17,297,329, included $17,062,631 (the amount the notice of deficiency determined), and held the estate liable for the accuracy-related penalty under section 6662(a) and (b)(1) (T.C. Memo. 2024-90). That is about $6.3 million more gross estate than the appraised interest (our arithmetic: $17,062,631 minus about $10.8 million).

148 T.C. 392 (2017) added two rules for any FLP where the parent can join in a decision to dissolve. First, the decedent’s “ability, acting with LP's other partners, to dissolve the partnership was a right” under section 2036(a)(2). Second, the inclusion is not the full value of the contributed assets: under section 2043(a) only “the excess of that value over the value of the limited partner interest” received is included.

The gift-tax side has its own trap. In 601 F.3d 763 (8th Cir. 2010), donors of LP interests in a partnership holding one company’s stock “claimed overall discounts of slightly over 49%.” The Tax Court held the agreement’s transfer restrictions did “not constitute a bona fide business arrangement within the meaning of section 2703(b)(1),” disregarded them, and “accepted lack-of-marketability discounts of 12.5%” and minority-interest discounts of 4.63% to 14.34%; the Eighth Circuit affirmed.

The 2016 section 2704 regulations: proposed, then withdrawn

Searches still turn up warnings that Treasury is about to “eliminate valuation discounts.” The record in the Federal Register:

The withdrawal reads: “The notice of proposed rulemaking published August 4, 2016 (81 FR 51413) is withdrawn as of October 20, 2017.” As of October 12, 2026 we found no later proposal on the same subject in the Federal Register (our search of federalregister.gov for section 2704 liquidation restrictions returned the 2016 proposal, its October 4, 2016 correction and the 2017 withdrawal). The law in force is the statute plus the existing regulations at 26 CFR 25.2704-2, under which an applicable restriction is one “more restrictive than the limitations that would apply under the State law generally applicable to the entity in the absence of the restriction.”

Who holds partnership interests at death: the IRS data

The IRS Statistics of Income Division publishes what estates report on Form 706. It has no “family limited partnership” category and publishes no discounts, so the closest data are two asset lines: real estate partnerships and other limited partnerships. Both include interests in syndications and funds as well as family entities, and one return can report both (our reading of the table).

Percentages are our arithmetic on SOI’s counts. What the table shows (our reading):

• The bigger the estate, the more often partnerships appear. Real estate partnership interests are on 19.2% of returns under $10 million and 44.1% of returns of $50 million or more; other limited partnerships go from 15.2% to 43.5%.
• Together the two lines are 9.4% of the $248.94 billion of gross estate reported on returns filed in 2024, and 11.4% of the $360.77 billion on the 9,024 returns filed in 2023 (our arithmetic).
• Most returns with real estate partnership interests owed no estate tax: 1,352 nontaxable returns reported them, against 703 taxable ones. For an estate that owes no tax, a lower value saves nothing and lowers the heirs’ basis (next section).

SOI’s partnership statistics from Form 1065 count real estate partnerships, but they do not identify family partnerships, so we left them out. For the market side, see our census of real estate LP and LLC offerings on Form D and the real estate syndication Form D data.

The $15,000,000 exclusion and what it changes

Public Law 119-21 (July 4, 2025), section 70106, replaced the $5,000,000 base in section 2010(c)(3) with $15,000,000, effective for “estates of decedents dying and gifts made after December 31, 2025.” Rev. Proc. 2025-32 gives a basic exclusion amount of $15,000,000 for calendar year 2026, the same figure for the generation-skipping transfer exemption, and says the basic exclusion amount “will be adjusted for inflation for calendar year 2027 and future years.” Section 70106 contains no sunset date (our reading of its text).

What follows from the documents, without predicting any family’s result (our reading):

• For an estate below the exclusion, a discount saves no estate tax and can cost income tax. Heirs take a basis equal to “the fair market value of the property at the date of the decedent's death” (26 U.S.C. 1014(a)(1)), and for a discounted LP interest that is the discounted value. Assets pulled back under section 2036 are property included in the gross estate, which section 1014(b)(9) treats as acquired from the decedent.
• Inside the partnership, the buildings keep the partnership’s old basis on a partner’s death unless a section 754 election is in effect or there is a substantial built-in loss (26 U.S.C. 743(a)). How that plays out for heirs is in our step-up in basis guide.
• The non-tax reasons do not depend on the exclusion: centralized control by a general partner, keeping property in one piece, and charging-order limits for partners’ creditors under state law. They are also the reasons the Tax Court accepted in the cases estates won.
• Estates above the exclusion, and families who expect to be, are the ones for whom sections 2036, 2703 and 2704 still decide real tax, and the IRS data show that is where partnership interests are most common.

Decision points for a family considering an FLP

What the documents make decisive, not a recommendation (our reading):

• The reason. The cases turn on whether a non-tax purpose actually motivated the partnership: managing an operating business or property, keeping a concentrated holding together, joint management by the next generation. A purpose that is only a theoretical justification does not count (124 T.C. 95).
• What goes in, and what stays out. Estates lost when the owner kept the benefit of contributed property or the partnership ignored formalities (T.C. Memo. 2005-65, T.C. Memo. 2011-259). In the 2012 real estate case the estate won, the owner kept over $1,100,000 of liquid assets in her own name (T.C. Memo. 2012-73).
• Timing. Partnerships formed or funded shortly before death lost in every such opinion in our table (148 T.C. 392, T.C. Memo. 2020-40, T.C. Memo. 2024-90).
• Control. A parent who can dissolve the partnership acting with the other partners holds what 148 T.C. 392 treated as a section 2036(a)(2) right.
• The valuation. Discounts are decided on appraisals under the willing buyer and willing seller test, after restrictions that fail sections 2703 or 2704 are ignored.
• The estate size in 2026. Below $15,000,000 per person, the trade is mainly control and creditor rules against a lower basis for heirs.

Who does the work: an FLP is a set of legal documents (certificate of limited partnership, partnership agreement, deeds and assignments) drafted by an estate-planning attorney licensed in the state of formation, valued by a qualified appraiser, and reported on Forms 709 and 706 with a CPA or the attorney. The match below connects you with fee-only or fee-based financial advisers. An adviser can look at the whole balance sheet and at what the parents keep outside the partnership to live on; an adviser does not draft the partnership. If you already have an attorney, take this page’s case list to that meeting.

This is analysis of public documents, not investment, legal or tax advice.

What a limited partner or heir can do with this

• Read the agreement for the three state-law rules: who can withdraw, who can dissolve, and what a transferee receives. Compare them with the default law of the state of formation.
• Ask for the appraisal behind any gift or estate tax value of your interest and the discounts used, and which restrictions the appraiser relied on, since sections 2703 and 2704 can disregard them.
• Look at how the partnership is run. Personal expenses paid from partnership funds, or a contributed property used without paying rent, are the facts the cases above treated as retained enjoyment.
• For your own basis, keep the Form 706 value of any interest you inherit and ask whether the partnership has a section 754 election in effect.
• If a family office runs the partnership, our family office guide explains how those structures are organized.

FAQ

Sources, read and saved on October 12, 2026: 26 U.S.C. 743, 1014, 2031, 2033, 2036, 2038, 2503, 2512, 2701, 2702, 2703 and 2704, United States Code 2024 edition, Government Publishing Office (govinfo.gov); 26 CFR 20.2031-1, 20.2031-3, 20.2036-1, 25.2512-1, 25.2703-1 and 25.2704-2 (eCFR); 81 FR 51413 (August 4, 2016) and 82 FR 48779 (October 20, 2017) from govinfo.gov; the Uniform Limited Partnership Act (2001) (Last Amended 2013), Final Act, Uniform Law Commission (uniformlaws.org); Delaware Code title 6, chapter 17, subchapters VI and VII (delcode.delaware.gov); Texas Business Organizations Code chapter 153 (Texas Legislature); Rev. Proc. 2025-32 (irs.gov) and Public Law 119-21 (govinfo.gov); United States Tax Court opinions T.C. Memo. 2003-145, 2003-309, 2005-65, 2005-126, 2007-107, 2008-74, 2009-212, 2011-209, 2011-259, 2012-73, 2015-249, 2016-51, 2016-183, 2020-40 and 2024-90, and 124 T.C. 95, 133 T.C. 340 and 148 T.C. 392, read from the Court’s public opinion database (ustaxcourt.gov), with appellate affirmances as the Tax Court cites them; the Eighth Circuit opinion at 601 F.3d 763 (No. 08-3774); and IRS Statistics of Income, Table 1, Estate Tax Returns Filed in 2024 and in 2023 (24es01fy.xlsx and 23es01fy.xlsx), saved with the scripts that read them. Shares, the case tally and the $6.3 million difference are our arithmetic. This is analysis of public documents, not investment, legal or tax advice.