What is a Family Limited Partnership?

​​Should You Create a Family Limited Partnership for Your Alabama Real Estate?

The Law Offices of Brenton C. McWilliams can help you explore whether a family limited partnership is the right tool for managing and transferring your Alabama real estate holdings. For families in Baldwin County who own vacation rentals, investment properties, or land passed down through generations, a family limited partnership (FLP) can be a strategic way to keep real estate in the family while reducing estate taxes and maintaining control.

An FLP isn’t the right fit for every family. But for those with significant real estate assets and a desire to transfer wealth to the next generation in a structured, tax-efficient way, it’s a tool worth understanding.

A family limited partnership is a legal business entity formed among family members. It has two types of partners:

General partners manage the day-to-day operations of the partnership and make decisions about the assets it holds. General partners have unlimited personal liability for the partnership’s obligations. In most family arrangements, the parents or senior generation serve as general partners.

Limited partners contribute capital or receive transferred interests but do not participate in management decisions. Their liability is limited to the amount of their investment in the partnership. Children and grandchildren typically hold limited partnership interests.

In Alabama, limited partnerships are formed by filing a certificate of limited partnership with the Secretary of State under the Alabama Business and Nonprofit Entities Code (Title 10A, Chapter 9). A written partnership agreement then governs the rights, duties, and responsibilities of each partner.

How an FLP Works with Alabama Real Estate

Here’s a common scenario. A couple in Fairhope owns several rental properties along the Eastern Shore and a vacation home in Gulf Shores. They want their children to eventually inherit these properties, but they’re concerned about estate taxes, the potential for family disputes, and losing control of the properties during their lifetime.

By forming an FLP, the couple transfers the real estate into the partnership. They retain a small general partnership interest (often 1-2%) and gift limited partnership interests to their children over time—often using the annual federal gift tax exclusion, which in 2026 allows gifts of up to $19,000 per recipient without gift tax consequences.

The parents remain in control of the properties as general partners. The children hold limited partnership interests that represent ownership value but carry no management authority. Over time, the parents have effectively moved real estate value out of their taxable estate while keeping decision-making power.

Benefits of a Family Limited Partnership for Real Estate

Valuation Discounts

One of the most significant advantages of an FLP involves valuation discounts for gift and estate tax purposes. Limited partnership interests are generally worth less than their proportional share of the underlying assets because they lack control rights and can’t be easily sold on the open market.

The IRS and courts have recognized two types of discounts that may apply: lack of marketability discounts and minority interest (lack of control) discounts. Combined, these discounts can reduce the taxable value of transferred interests by 20-40%, depending on the specific circumstances. For families with substantial real estate holdings, this can result in meaningful estate tax savings.

However, the IRS scrutinizes FLPs closely. To support these discounts, the partnership should serve a legitimate business purpose beyond simply reducing taxes, and a qualified appraiser should determine the appropriate discount.

Maintaining Control of Family Property

An FLP allows the senior generation to transfer ownership value while retaining management authority. As general partners, parents control decisions about buying, selling, leasing, or improving partnership properties. Limited partners cannot force a sale, demand distributions, or override the general partners’ decisions.

This is especially valuable in Baldwin County, where families may own property that holds both financial and sentimental value—a beachfront home in Orange Beach, a family compound in Fairhope, or commercial property in Foley. An FLP keeps these assets under experienced management while transferring economic value to the next generation.

Creditor and Divorce Safeguards

Under Alabama law, a creditor of a limited partner generally cannot seize the partnership interest itself. Instead, the creditor’s remedy is typically limited to obtaining a “charging order,” which gives them a right to any distributions the partnership makes to that partner—but does not give them ownership or voting rights.

This means that if one of your children faces a lawsuit or goes through a divorce, the family’s real estate holdings inside the FLP have a layer of insulation. The partnership agreement can also include provisions restricting transfers of partnership interests, helping ensure that property stays within the family even through life changes.

Avoiding Multi-State Probate

For Alabama families who own real estate in other states, an FLP can eliminate the need for ancillary probate. When real estate is held directly in an individual’s name, probate proceedings are typically needed in every state where property is located. But a partnership interest is personal property, subject to probate only in the state where the owner resides.

By transferring out-of-state properties into the FLP, families can consolidate their estate administration in Alabama—saving time, legal fees, and the headaches of dealing with unfamiliar courts.

Centralized Management and Cost Savings

An FLP allows the family to pool resources for property management, insurance, maintenance, and accounting. Instead of each family member managing their share of the properties independently, the general partners handle everything through a single entity. This can reduce costs and improve the overall management of the family’s real estate portfolio.

Important Considerations and Potential Drawbacks

General Partner Liability

General partners carry unlimited personal liability for the partnership’s debts and obligations. Many families address this by forming a limited liability company (LLC) to serve as the general partner of the FLP, adding a layer of personal liability insulation for the individuals managing the partnership.

IRS Scrutiny

The IRS has challenged FLPs that appear to exist solely for tax avoidance purposes. To withstand scrutiny, your FLP should have a genuine business purpose—such as consolidated management of family real estate, centralized investment decisions, or facilitating an orderly transfer of a family business.

Additionally, the partnership should be properly funded and operated. Commingling personal and partnership assets, failing to maintain separate accounts, or ignoring partnership formalities can jeopardize the tax benefits.

Loss of Direct Ownership

Once properties are transferred into the FLP, they belong to the partnership—not to any individual partner. This means you can’t sell or mortgage a property on your own. All transactions go through the partnership according to the partnership agreement.

For many families, this is actually a benefit because it prevents any single family member from making unilateral decisions about shared property. But it does mean giving up some personal flexibility.

Setup and Ongoing Costs

Forming an FLP involves legal fees for drafting the partnership agreement and filing with the Alabama Secretary of State. You’ll also need a qualified appraisal for valuation discount purposes. Ongoing costs include maintaining a separate bank account, filing an annual partnership tax return (IRS Form 1065), and keeping proper records of partnership activities.

Is an FLP Right for Your Family?

A family limited partnership may be a good fit if:

• You own multiple properties or high-value real estate in Alabama
• You want to gradually transfer wealth to your children while maintaining control
• Your estate may be subject to federal estate taxes (above the current exemption threshold)
• You’re concerned about safeguarding family property from creditors or divorce
• You own real estate in multiple states and want to avoid probate complications

An FLP may not be the best choice if you own a single property, your estate is well below the estate tax exemption, or you prefer a simpler structure. In those cases, a revocable living trust or other estate planning tools may accomplish your goals more efficiently.

FLP vs. LLC: Which Is Better for Alabama Real Estate?

Many families wonder whether an FLP or an LLC is the better choice. Both offer liability insulation and can be used for estate planning, but they have different characteristics.

An FLP has a built-in two-tier structure (general and limited partners) that naturally lends itself to estate planning, where the older generation retains control and the younger generation holds economic interests. An LLC provides more flexibility and limits the personal liability of all members, including those who manage the entity.

Some families use both—forming an LLC to serve as the general partner of the FLP, which combines the estate planning structure of a partnership with the liability protection of an LLC. Your estate planning attorney can help you determine which structure, or combination, best fits your family’s goals.

Start a Conversation About Your Alabama Real Estate

At the Law Offices of Brenton C. McWilliams, we help Baldwin County families develop estate planning strategies that safeguard their real estate and provide for future generations. Whether you own a single vacation home or a portfolio of rental properties, we’re here to help you understand your options and build a plan that reflects your family’s values and goals.

Call our law firm today to start a conversation about family limited partnerships and other tools for managing your Alabama real estate. We serve families from our offices in Orange Beach, Foley, and Daphne.

This article is for informational purposes only and does not constitute legal or tax advice. The tax benefits of family limited partnerships depend on proper formation, operation, and compliance with IRS rules. Consult with an estate planning attorney and tax professional before forming an FLP.

External Resources:

• Alabama Secretary of State — Business Entity Filings
• IRS — About Form 1065, U.S. Return of Partnership Income
• Alabama Business and Nonprofit Entities Code, Title 10A