What Is a Limited Family Partnership?

A limited family partnership is a partnership where all members are family members. Family partnership members include general and limited partners.

Limited Partners

Limited partners typically are not involved in the business operation. Limited partner liability for debts of the partnership is limited to the amount of capital contributed by each partner to the partnership.

General Partners

General partners typically are involved in the routine business operation. General partners are personally responsible for the debts of the partnership.

IRS Recognition

To be considered a limited family partnership for federal tax purposes, a partnership must meet the following factors: if capital is a significant income producing factor, family members must have acquired their capital interest in a legitimate transaction. A family member's share of the partnership must be owned and controlled. If capital is not a significant income producing factor, family members must have joined together in good faith to conduct the business. (Reference 1)

Capital Interest

A capital interest is an interest in its assets that may be distributed to its owner when the owner withdraws from the partnership or the partnership dissolves. Simply sharing in the earnings and profits of a partnership is not considered a capital interest.

Advantages of a Limited Family Partnership

Partnership interests gifted to other family members are typically valued at less than the full fair market value of the underlying assets. When a partner dies, only the value of the partner's ownership interest will be include in the partner's gross estate. Management control of the business is maintained while transferring limited ownership to family members.

References

• IRS; Partnerships; Publication 541; April 2008;