California Family Limited Partnerships: Protect Family Assets and Streamline Estate Transitions

What is a California Family Limited Partnership?

A Family Limited Partnership (FLP) is a limited partnership formed under California law to hold and manage family assets such as investment accounts, real estate, or closely held business interests. Typically, parents or senior family members serve as general partners (GPs) managing the FLP, while children or trusts hold limited partner (LP) interests. LPs generally enjoy limited liability and typically do not participate in day-to-day management; however, any personal guarantees or wrongful acts can still create personal exposure.

Why families use FLPs

• Centralized control: GPs retain managerial control over assets while transferring economic interests to younger generations.
• Liability protection for LPs: LPs are generally not personally liable for partnership debts beyond their agreed contributions.
• Estate planning flexibility: LP interests can be gifted or sold over time, helping shift future appreciation out of a taxable estate.
• Potential valuation discounts: Non-controlling, non-marketable LP interests may support valuation discounts for transfer tax purposes, subject to appraisal support and IRS scrutiny.
• Streamlined transitions: Assets titled in the FLP do not need to be retitled at each generational change; when the partnership interest is held in a revocable living trust, this can reduce the scope of court-supervised probate.

FLPs and reducing probate exposure

Probate in California is the court process to transfer title to assets owned in an individual’s name at death. When assets are held by an FLP, the decedent typically owns a partnership interest rather than each asset directly. If that partnership interest is held by a revocable living trust, the interest can pass under the trust instrument rather than through probate. This approach can reduce court involvement and related delays and costs. The exact impact depends on asset titling and the completeness of the overall estate plan.

Core legal framework in California

• Governing law: California limited partnerships are governed by the Uniform Limited Partnership Act of 2008, codified at Corporations Code sections beginning at §15900.
• Formation filing: Forming a California limited partnership requires filing a Certificate of Limited Partnership (Form LP-1) with the Secretary of State; see the Secretary of State’s LP filing tips and forms.
• Taxes and returns: California limited partnerships are generally subject to the Franchise Tax Board’s partnership filing requirements and the annual $800 tax; see the FTB’s guidance for partnerships here. Separate Secretary of State statements and fees may also apply.

Key federal tax considerations

• Gift and estate tax: Transfers of LP interests are subject to federal gift and estate tax rules. Values should reflect fair market value with any discounts supported by qualified appraisal.
• IRC Section 2036 risk: Retaining too much control or enjoyment of transferred property can cause inclusion in the taxable estate. Observing partnership formalities and avoiding commingling are critical.
• Income taxation: An FLP is a pass-through entity; items of income, deduction, and credit flow to partners. Any special allocations must have substantial economic effect.
• Basis rules: Step-up in basis and basis carryover depend on how and when interests are transferred and who owns them at death.

Formation steps in California

• Choose a compliant name and registered agent.
• Draft a written limited partnership agreement tailored for family governance, transfers, valuation, and dispute resolution.
• File the Certificate of Limited Partnership (Form LP-1) with the California Secretary of State.
• Obtain an EIN from the IRS.
• Open dedicated FLP bank/brokerage accounts and retitle assets into the FLP.
• Observe formalities: maintain books, hold periodic meetings, document decisions, and keep personal and FLP finances separate.
• Address California tax filings and the generally applicable $800 annual tax with the Franchise Tax Board, and file any required Secretary of State statements when due.

Common assets to place in an FLP

• Income-producing real estate and family limited liability company interests
• Marketable securities and diversified investment portfolios
• Interests in closely held operating businesses (often held indirectly through an LLC for liability segregation)
• High-value tangible property where centralized management makes sense

Practical safeguards and pitfalls

• Avoid commingling funds or using the FLP as a personal checking account.
• Document capital contributions and distributions per the partnership agreement.
• Use independent appraisals to support valuations for gifts or sales of LP interests.
• Consider a professional manager or co-GP if family dynamics or fiduciary duties raise concerns.
• Be realistic about asset protection: fraudulent transfer laws and alter-ego theories can unwind transfers made to hinder known creditors.

Coordinating FLPs with trusts

Families often hold GP or LP interests in revocable or irrevocable trusts to meet estate planning goals. For probate minimization, a revocable trust commonly holds the decedent’s partnership interest during life. Irrevocable trusts can receive gifted LP interests for longer-term wealth transfer and creditor/divorce planning, subject to tax and fiduciary considerations.

When an FLP may not fit

If the asset mix is simple, administrative costs may outweigh benefits. Highly leveraged operating businesses, personal residences used by partners, or assets needing frequent personal use can complicate partnership formalities. An LLC with a tailored operating agreement or a simple revocable trust may be more efficient in some cases.

Maintaining compliance over time

• Keep the partnership agreement current with changes in law and family circumstances.
• File required Secretary of State statements and pay associated fees.
• Provide partners with Schedules K-1 and maintain accurate accounting.
• Pay the FTB annual tax as applicable and file required returns.
• Periodically reassess valuations and update gifting plans.
• Review insurance coverage and liability segregation across entities.

FAQ

Do FLPs eliminate California probate?

No. FLPs can reduce what goes through probate when the partnership interest is titled in a revocable trust, but they do not eliminate probate by themselves.

Can a single person form a California FLP?

You need at least two partners under California law, typically a GP and at least one LP. A trust or entity can be a partner.

Are valuation discounts guaranteed?

No. Discounts depend on facts and appraisal support and are subject to IRS scrutiny.

What annual costs should we expect?

Common items include the California $800 annual tax (if applicable), tax preparation, registered agent, biennial statements, and professional advisory fees.

Should my home be placed in an FLP?

Usually not. Personal-use assets can complicate formalities and invite estate tax inclusion risks.

Next steps

Before forming an FLP, gather an asset inventory, identify decision-makers, and clarify objectives around control, taxation, and transition. Engage California counsel and a tax advisor to draft the partnership agreement, file state forms, and design coordinated trust and gifting strategies tailored to your situation. Contact us to discuss whether an FLP is a fit for your family.

References

• California Corporations Code (Uniform Limited Partnership Act of 2008, starting at §15900)
• California Secretary of State — Limited Partnerships Filing Tips and Forms
• California Franchise Tax Board — Partnerships

California-specific disclaimer

This blog is for general informational purposes only and is not legal, tax, or investment advice. Reading it does not create an attorney-client relationship. Laws and deadlines change, and how they apply depends on your facts. Consult qualified California counsel and a tax advisor before acting.