Estate planning can be complicated if the assets in question are tied to a farm, ranch or family business. The Family Limited Partnership, FLP, allows you to remove, through the gift of partnership interests to your children, all or a portion of the business, as well as future appreciation on those assets, from your estate and still retain control. In so doing, you reduce the size of your taxable estate when you die.

You must have a business purpose to set up a Family Limited Partnership. No state has a law to establish Family Limited Partnerships but every state has a Limited Partnership Statute. A FLP is a limited Partnership where family members or individuals you choose are partners.

When you set up the FLP, you transfer the business assets into the partnership in exchange for a partnership basis. Over time, you can gift these limited partnership interests to your children. Since the minority interest being gifted carries no management voice in the partnership, the interest is discounted. So while you technically give interests in increments presently allowed by law of $12000 per person per year to avoid the gift tax, you can actually give assets worth 15 to 25 percent and more because of the discount. But you need to get a reliable appraisal first so that you can justify to the Internal Revenue Service any discount percentage you use.

You maintain control of how the assets are managed, how the partnership is run, how income is distributed, and if and when assets are sold. You pass interest in your business to your children at a discount. Their interest steps-up to current market value for the  assets when you die. If written well, the Family Limited Partnership may also protect your assets from your offspring's creditors, divorced spouses and future lawsuits with the protection of a "charging order".

The remaining interest you own in the Family Limited Partnership at the time of your death is included in your estate.