The benefits of creating a FLP include (i) management and control; (ii) asset protection; and (iii) reduced estate taxes. A FLP is a legal entity and involves two types of partners: a general and a limited. A general partner makes decisions, such as negotiating and executing an oil/gas lease. Alternatively, a limited partner (LP) does not participate in the FLP’s day-to-day activities, but receives a pro rata share of the FLP’s annual royalty income. Certain heirs may be better suited to manage the oil/gas activities, as the general partner. However, landowners typically want all their heirs to enjoy the royalty income, i.e., as limited partners.
A limited partnership interest is unattractive to creditors including divorcing in-laws (aka “outlaws”) because it is illiquid. The fair market value of a LP interest is generally subject to discounts for lack of marketability and minority interest. These combined discounts can reduce any estate and gift taxes. Centralized management, protection from outlaws and reduced taxes make the FLP an attractive vehicle for many landowners.