Family Limited Partnership (FLP): Definition and How It Works in California

By Eric Ridley, attorney, Ridley Law. Updated October 2026.

A family limited partnership (FLP) is a partnership family members form to hold investments or a business, usually with the parents in control. Limited interests given to children are often valued at a discount, because they carry no control and are hard to sell.

How it works in California

Ridley Law has a full guide to family limited partnerships in California. The main estate tax risk is 26 U.S.C. § 2036(a). If a parent transfers assets to the partnership but keeps, for life, the possession or enjoyment of the assets or the right to their income, or the right to decide who enjoys them, the full value comes back into the estate unless the transfer was a bona fide sale for adequate and full consideration. An FLP has to be run as a real business, with its own accounts and records, for that exception to hold.

California’s property tax adds a second test. When anyone obtains more than 50 percent of the partnership’s interests, its real property is reassessed (Rev. & Tax. Code, § 64(c)). If real estate went into the partnership under the proportional-ownership exclusion, it is also reassessed once the original co-owners have transferred more than 50 percent of the interests, counted cumulatively (§ 64(d)). Gifts to children over many years can cross that line without anyone noticing.

Why it matters

A family can move a large share of a portfolio or business to the next generation while the parents keep management. In a hypothetical, parents give their children 40 percent limited interests in an FLP holding $20 million. If an appraiser applies a discount for lack of control and marketability, the taxable gift is less than the $8 million pro rata value. The discount holds up only as well as the appraisal behind it and the way the partnership is run, day to day and year after year.

Common mistakes

Paying personal bills from partnership accounts, or putting the family home in the partnership and living there rent-free. Forming it late in life with nearly everything the parent owns. And moving California real estate into the partnership, then gifting interests, without tracking the reassessment thresholds.

Related terms

• Defined Value Clause: a formula that limits gift tax exposure if the IRS disputes the discounted value.
• Section 6166: estate tax deferral that applies only to a partnership carrying on a trade or business.
• Intentionally Defective Grantor Trust (IDGT): limited partnership interests are often sold to an IDGT for a note.

Part of the California estate planning glossary. For the full treatment, see Family Limited Partnerships in California.