Family Limited Partnerships in California

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

Estate size this page covers: the estate tax side matters above $15 million for a single person or $30 million for a married couple, and at every size above $100 million. The California property tax side matters at any size, because a family partnership that holds real estate can trigger reassessment no matter what the estate is worth.

Family limited partnerships get sold as a way to cut estate tax, protect assets, and keep control, all at once. Some of that is true. What the sales pitch usually leaves out is the California piece: an FLP that holds real estate is a property tax event waiting to happen, and the Prop. 19 exclusion that families count on doesn’t apply to partnership interests.

I draft trusts and business entity documents for families in Ventura, Santa Barbara, and Los Angeles counties. This page explains how an FLP works under California law, what the valuation discount is and isn’t, why the IRS litigates these, and how the Revenue and Taxation Code treats the real property inside one.

What is a family limited partnership?

It’s an ordinary California limited partnership whose partners are family members. There’s no separate “FLP” statute. The family part is in the partnership agreement.

California limited partnerships are formed under the Uniform Limited Partnership Act of 2008 (Corp. Code § 15900). Every limited partnership has at least one general partner, who manages, and one or more limited partners, who invest and don’t manage. In a typical FLP, the parents or an entity they control serve as general partner, and interests are gifted or sold to children over time.

The two roles carry very different liability. All general partners are liable jointly and severally for the partnership’s obligations unless the claimant agrees otherwise (Corp. Code § 15904.04(a)). A limited partner generally isn’t liable for partnership obligations unless the limited partner is named as a general partner or participates in control of the business (Corp. Code § 15903.03(a)). That’s why most FLPs use an LLC as the general partner, owned and managed by the parents, so no individual carries unlimited liability.

How does an FLP let parents keep control?

The general partner makes the decisions, and a limited partner or a transferee can’t vote on management. Parents can give away most of the value and keep the steering wheel.

A transferee of a partnership interest has the right to receive distributions, but isn’t entitled to participate in management or to exercise the other rights of a partner (Corp. Code § 15907.02(a)(3)). A transfer that violates a restriction in the partnership agreement is ineffective as to anyone who had notice of it (Corp. Code § 15907.02(f)). A well-drafted FLP agreement uses both rules: interests can move only within the family, and a child’s divorce or bankruptcy doesn’t hand a stranger a vote.

The control that makes an FLP attractive is the same control the IRS looks at. More on that below.

What is the valuation discount?

An interest in a partnership is usually worth less than its share of the partnership’s assets, because the holder can’t control distributions or force a sale. Appraisers express that as discounts for lack of control and lack of marketability.

Here’s a simplified example. An FLP holds $4,000,000 of Ventura County rental property. A parent gives a child a 10 percent limited partner interest. The child’s pro rata share of the assets is $400,000. If a qualified appraiser concludes that a buyer would pay 25 percent less for a minority, non-voting, transfer-restricted interest, the gift is valued at $300,000.

Item	Amount
FLP assets	$4,000,000
10 percent limited partner interest, pro rata	$400,000
Appraised value with a hypothetical 25 percent combined discount	$300,000
Value removed from the gift at that discount	$100,000

The 25 percent figure is an illustration, not a benchmark. The actual discount depends on the assets, the agreement’s terms, and the appraiser’s analysis, and it’s the appraiser’s job, not mine or your CPA’s. The business valuation guide explains what appraisers look at.

Two federal statutes limit how far drafting can push the number. IRC § 2703 says value is determined without regard to restrictions on selling or using the property, unless the restriction is a bona fide business arrangement, isn’t a device to transfer property to family for less than full value, and has terms comparable to arm’s-length arrangements. IRC § 2704(b) disregards certain restrictions on liquidating a family-controlled partnership when valuing an interest transferred to a family member.

The appraisal has to stand on its own

A gift of FLP interests reported on Form 709 only starts the IRS’s time limit to assess gift tax if the gift is adequately disclosed. Without adequate disclosure, the tax can be assessed at any time (Treas. Reg. § 301.6501(c)-1(f)(1)). Disclosure includes a description of the method used to value the interest and of any discounts claimed, or an appraisal by a qualified appraiser who isn’t the donor, a donee, a family member of either, or anyone employed by them (§ 301.6501(c)-1(f)(2)(iv), (f)(3)). My page on valuation discounts and adequate disclosure covers what the appraisal has to contain and the penalty cases.

Why does the IRS challenge FLPs under IRC § 2036?

Because a parent who gives away partnership interests but keeps living off the assets hasn’t given anything away in substance. When that happens, the assets come back into the parent’s estate at full value, with no discount.

IRC § 2036(a) includes in the gross estate property the decedent transferred while keeping, for life, the possession or enjoyment of the property or the right to its income. It also covers keeping the right, alone or with others, to designate who enjoys the property or its income. The main exception is a bona fide sale for adequate and full consideration.

These are the facts that look like retained enjoyment under IRC § 2036(a), and they’re the ones to avoid:

• A parent lives in a house the FLP owns without paying fair rent.
• Partnership money pays the parent’s personal bills, or accounts are commingled.
• The parents put nearly everything they own into the FLP and kept too little to live on.
• Distributions go to the parents whenever they ask, and not pro rata to all partners.
• The partnership was formed shortly before death with no reason other than tax.
• Nobody keeps books, holds meetings, or files the partnership’s returns on time.

I’m stating the rule at summary level on purpose. Whether a particular FLP holds up is a question for your estate planning attorney and your CPA together, looking at your facts.

What courts require: FLP cases won and lost

Section 2036 has an exception for a “bona fide sale for an adequate and full consideration,” and nearly every FLP case turns on it. The Tax Court’s test is that the record must show a legitimate and significant nontax reason for creating the partnership, and that the partners received interests proportionate to what they contributed. A significant purpose has to be an actual motivation, not a theoretical justification (Estate of Bongard v. Commissioner (2005) 124 T.C. 95). The Fifth Circuit asks whether the transfer, as an objective matter, served a substantial business or other nontax purpose (Strangi v. Commissioner (5th Cir. 2005) 417 F.3d 468). Below are cases on both sides.

The pattern is consistent. The families who won kept their personal finances separate, held assets that needed real management or a real family governance reason, and formed the entity while healthy. The families who lost outright moved most of their wealth late in life, kept living off the assets, and couldn’t point to a reason the partnership served other than the discount. Bongard lost on a partnership formed about two years before an unexpected death, because it was layered on an entity that already served the business purpose. My page on deathbed family limited partnerships covers the late-formation cases in more detail.

FLP formalities checklist

Each item below comes from facts the courts weighed in the cases above.

• Form and fund the partnership while you’re healthy. Each outright IRS win on this page involved a partnership funded within months of death, and in Powell and Fields within weeks.
• Keep enough outside the partnership to live on and to pay your own bills, bequests and taxes. Mr. Strangi was left with $762 in liquid assets. Mrs. Kimbell kept more than $450,000.
• Retitle every asset into the partnership’s name, and keep the partnership’s accounts separate from yours.
• Make distributions pro rata to all partners, never on request to one parent.
• Pay fair rent, on time, for anything you use. A rent entry on the books isn’t enough.
• Write down the nontax reason and then act on it. Active management of working assets helped in Kimbell. A brokerage account professionally managed elsewhere didn’t help in Fields.
• Don’t let one person sign on both sides of every transaction. Courts noticed that in Fields.
• Check the dissolution and amendment terms. In Powell, the decedent’s vote with the other partners to dissolve was enough for § 2036(a)(2).
• Get a qualified, independent appraisal for each gift and disclose it on a timely Form 709.

What a failed FLP costs

This example is hypothetical. A parent whose estate is already over the exemption puts $20,000,000 of assets into an FLP and dies holding a limited partner interest. An appraiser applies a 15 percent discount for lack of control and a 25 percent discount for lack of marketability, the same pair claimed in Fields, which values the interest at $12,750,000. If the partnership holds up, the estate tax on it is $5,100,000. If the IRS pulls the assets back in under § 2036, the tax is $8,000,000, and a 20 percent accuracy-related penalty on the $2,900,000 underpayment adds $580,000. The Fifth Circuit upheld that kind of penalty in Fields.

The discount is worth $2,900,000 here if the partnership is respected. When it isn’t, the family pays more than if there had been no partnership at all, plus the cost of the appraisal, the annual returns and the litigation.

Do California families still need an FLP for estate tax?

Most don’t. The federal estate tax exemption is $15,000,000 per person in 2026, and California has no estate or inheritance tax.

The IRS confirms the 2026 basic exclusion amount of $15,000,000 under the law signed July 4, 2025. For a married couple with good planning, that covers most estates, including families with a business and several rental properties. The California estate tax planning page covers portability and the other pieces.

If your estate is below the exemption, an FLP’s tax benefit is small and its costs are real:

• An annual California tax on the partnership, set by Rev. & Tax. Code § 17935 at the minimum franchise tax amount, which is $800 (Rev. & Tax. Code § 23153(d)(1)).
• Separate federal and California partnership returns every year.
• An appraisal each time interests are gifted.
• The property tax exposure described next.
• A possible loss of basis step-up on the discounted interests at death, which is a question for your CPA.

For a family below the exemption, the same goals of control, orderly transfer, and probate avoidance usually come from a funded living trust and, for rentals, an LLC. See the rental LLC guide.

How does Prop. 13 treat real property in an FLP?

Transfers of partnership interests usually don’t reassess the partnership’s real estate. The exceptions swallow the rule for a family that plans to move ownership to the next generation.

Apart from the exceptions below, transferring ownership interests in a legal entity isn’t a transfer of the entity’s real property (Rev. & Tax. Code § 64(a)). There are two big exceptions.

Change in control: one person gets a majority

When any person or entity obtains a majority ownership interest in a partnership, that transfer is a change of ownership of all the real property the partnership owns (Rev. & Tax. Code § 64(c)(1)). If one child ends up with more than half the partnership, the property is reassessed.

Original co-owners: the cumulative 50 percent rule

This is the one that catches FLPs. Contributing real property to a partnership is excluded from reassessment only when each transferor’s proportional interest in each property stays the same after the transfer (Rev. & Tax. Code § 62(a)(2)). When a family uses that exclusion, the people holding the partnership interests right after the contribution become “original coowners” (Rev. & Tax. Code § 64(d)).

From then on, the partnership keeps a running count. Whenever interests representing cumulatively more than 50 percent of the total are transferred by the original co-owners, in one transaction or several, the property previously excluded is reappraised (Rev. & Tax. Code § 64(d)). No single child needs a majority. Years of annual gifts to three children add up.

A worked example

Mom and Dad own an Oxnard fourplex worth $2,400,000 with a Prop. 13 taxable value of $600,000. They deed it to a new FLP and receive 100 percent of the partnership interests in the same proportions they held the building, so the contribution is excluded and they become the original co-owners.

Each year they give each of their three children a limited partner interest. After seven years, the children together hold 51 percent. On the date of the gift that pushed the running total past 50 percent, the fourplex is reappraised at market value. The tax bill resets to roughly four times the prior amount, because it now tracks $2,400,000 instead of $600,000. None of the children holds a majority, and it still happens.

If the parents had kept the building and left it to the children through their trust, the children would also face reassessment, because a rental isn’t a principal residence. The difference is timing and control. With an FLP, the family picks the date, and can stop gifting at 50 percent and hold the rest until death.

Does Prop. 19 protect property inside an FLP?

No. The Prop. 19 parent-child exclusion applies to real property, and the statute says real property doesn’t include any interest in a legal entity (Rev. & Tax. Code § 63.2(e)(8)).

Prop. 19’s exclusion covers a principal residence that becomes the child’s principal residence, and a family farm, and nothing else (Rev. & Tax. Code § 63.2(a)). A rental fourplex never qualified. The real cost shows up for families with a family farm, defined as property under cultivation, used for pasture or grazing, or used to produce an agricultural commodity (Rev. & Tax. Code § 63.2(e)(4)). Held directly, a farm parcel may qualify for the exclusion when it passes to a child. Held through an FLP, what passes is a partnership interest, and the exclusion doesn’t apply.

Keep the family home out of an FLP. Held in a partnership, the home can’t use the parent-child exclusion, and a living trust already handles it well. The Prop. 19 planning page covers the home.

What filing does the FLP owe when ownership changes?

A change in ownership statement to the State Board of Equalization within 90 days, on form BOE-100-B. Missing it carries a penalty even if no reassessment results.

When the original co-owners’ transfers cross the cumulative 50 percent line, the partnership must file a signed statement with the Board of Equalization within 90 days (Rev. & Tax. Code § 480.2(a)). When one person acquires control of the partnership, that person must file within 90 days (Rev. & Tax. Code § 480.1(a)). Failing to file carries a penalty of 10 percent of the taxes on the new base year value, or 10 percent of the current year’s taxes if no change occurred (Rev. & Tax. Code § 482(b)).

The BOE explains why the program exists: transfers of entity interests ordinarily don’t involve a recorded deed, so county assessors wouldn’t otherwise learn about them. The form is BOE-100-B, Statement of Change in Control and Ownership of Legal Entities. Your partnership agreement should require the general partner to track the running percentage and file on time.

Does an FLP protect assets from creditors?

It limits what a partner’s personal creditor can reach. It doesn’t protect assets moved into it to dodge a creditor you already have.

A judgment creditor of a partner can ask the court for a charging order against the partner’s transferable interest, and to that extent the creditor has only the rights of a transferee (Corp. Code § 15907.03(a)). The charging order is the exclusive remedy against the partner’s transferable interest (Corp. Code § 15907.03(e)). A creditor of a partner has no right to possess or otherwise reach partnership property (Corp. Code § 15907.03(f)).

Keep two limits in mind. The court may order foreclosure on the charged interest (Corp. Code § 15907.03(b)), so the protection isn’t absolute. And the general partner’s liability for the partnership’s own debts is unlimited unless the general partner is an entity. The asset protection page sets realistic expectations.

FLP or family LLC?

Many California families now use a family LLC for the same purposes. The LLC gives every owner limited liability without a separate general partner entity.

Feature	Family limited partnership	Family LLC
Statute	Corp. Code § 15900 and following	Corp. Code § 17701.01 and following
Liability of managers	General partner personally liable unless it’s an entity	Members and managers generally protected
Control	General partner	Manager named in the operating agreement
Transferee rights	Distributions only	Distributions only
Property tax rules	Rev. & Tax. Code § 64 applies	Rev. & Tax. Code § 64 applies
Annual California tax	Annual minimum tax	Annual LLC tax, plus a fee at higher gross receipts

The holding company LLC page and the $800 LLC tax page cover the LLC side.

What changes in California

The federal case law above applies the same way in California, and Powell involved a California decedent. California adds the points below, most of them covered in more detail earlier on this page.

• Entity law. Limited partnerships are governed by the Uniform Limited Partnership Act of 2008 (Corp. Code § 15900), and LLCs by the California Revised Uniform Limited Liability Company Act (Corp. Code § 17701.01).
• Charging orders. For both entities, a charging order is the exclusive remedy for a partner’s or member’s judgment creditor against the transferable interest (Corp. Code § 15907.03(e) and Corp. Code § 17705.03(f)). The court can still order foreclosure of the charged interest in both.
• Property tax. A majority interest moving to one person reassesses all of the entity’s real property (R&T Code § 64(c)(1)), and transfers by original co-owners of more than 50 percent cumulatively reassess property that came in under the proportional-interest exclusion (§ 64(d)). The Prop. 19 parent-child exclusion doesn’t reach entity interests (§ 63.2(e)(8)).
• Annual tax and fee. A limited partnership pays the annual tax set by § 23153, which is $800 (R&T Code § 17935). An LLC pays the same $800 tax (R&T Code § 17941) plus a fee once its California total income reaches $250,000, running from $900 to $11,790 at $5 million or more (R&T Code § 17942).
• No state estate tax. California has no estate or inheritance tax, so the FLP’s transfer tax value is entirely federal.

What works and what fails

Who does what in an FLP

• Your attorney drafts the partnership agreement, the certificate of limited partnership, the general partner LLC, the deeds and assignments into the partnership, and the gift assignments, and coordinates it all with your trust.
• A qualified appraiser values the real estate and then values each gifted interest, including any discount.
• Your CPA files the partnership returns, the gift tax returns, and advises on basis and income tax. The IRS lists the 2026 annual exclusion at $19,000 per recipient, and your CPA reports larger gifts on the federal gift tax return.
• The general partner keeps the books, makes pro rata distributions, and tracks the property tax transfer count.

Working with Ridley Law

If you’re weighing an FLP or a family LLC, or you already have one, I can review the agreement, the funding and the history and tell you how it would likely fare. The first call is free and runs 30 minutes, by phone or Zoom. I work alongside your CPA and, where the matter calls for it, co-counsel. Work at this level is built for each family and quoted in writing before any drafting starts.

Book my 30-minute call or call 805-244-5291.

Frequently asked questions

Is a family limited partnership worth it in California?

For an estate well above the $15,000,000 federal exemption, it can be. For most families below it, the annual cost, the appraisals, and the property tax exposure outweigh the benefit. A funded living trust and an LLC for rentals usually accomplish the control and probate goals for less.

Does an FLP avoid probate?

Not by itself. The partnership continues, but your own partnership interest is your property, and it goes through probate if it’s in your individual name. Hold your FLP interest, and your interest in the general partner LLC, in your living trust.

What happens to an FLP when the general partner dies?

That depends on the partnership agreement, which should name a successor general partner. If the general partner is an LLC owned by the parents’ trust, the successor trustee steps into control of the LLC without court. The LLC owner death page covers that handoff.

Can I put my house in a family limited partnership?

You can, but you shouldn’t. A home in an FLP loses access to the Prop. 19 parent-child exclusion and invites an IRC § 2036 challenge if you keep living there. Your living trust handles the house better.

How much of the FLP can I give my children before property tax reassessment?

If the property went in under the proportional-interest exclusion, reassessment happens once the original owners have transferred cumulatively more than 50 percent. Gifts up to that line don’t reassess by themselves, but a single child who gains a majority triggers a change in control at any point. Track the numbers in writing.

Do I need an appraisal every time I gift FLP interests?

Your CPA will almost always want one to support the value on the gift tax return, especially if a discount is claimed. The appraisal is what the IRS reviews if it questions the gift.

Can an FLP be set up after a terminal diagnosis?

It can be signed, but it rarely holds up. In Strangi, Powell, Moore and Fields, partnerships formed or funded shortly before death were pulled back into the estate under IRC § 2036, and Fields added a 20 percent penalty.

What counts as a legitimate nontax reason for an FLP?

One that motivated the partnership in fact and that the record backs up. Courts accepted active management of oil and gas working interests in Kimbell, joint family management in Mirowski, and preparing a company for a sale or offering in Bongard. They rejected asset protection and management claims that the facts didn’t support in Strangi and Fields.

Does the IRS still challenge FLPs in 2026?

Yes. The Fifth Circuit affirmed the IRS’s win in Estate of Fields in 2026, including the accuracy-related penalty, on a partnership funded in the month before death.

Is a family LLC safer than a family limited partnership?

For liability, often, because no one has to serve as an individual general partner. For estate tax, the IRC § 2036 analysis is the same, and Mirowski and Bongard both involved LLCs. The California property tax rules in R&T Code § 64 apply to both.