Family limited partnerships: pass it down at a discount, with control

The numbers

Picture parents who place $10 million of rental real estate in a family limited partnership. They keep the general partner interest and control. They gift limited partner interests equal to 49% of the partnership to their children. A qualified appraiser applies a combined 30% discount for lack of control and lack of marketability.

For illustration purposes. Tax law may change, which may change these calculations slightly.

Federal gift and estate tax (separate from income tax)

The discount lets the parents pass $4.9 million of value using only $3.43 million of exemption. For a family whose estate will be taxed, the $1.47 million of exemption left over is worth about $588,000 of federal estate tax. All future growth on the gifted interests is also outside the parents’ estate. Oklahoma doesn’t currently have its own estate or inheritance tax.

The discount isn’t a number we pick. It comes from an independent appraisal based on the partnership agreement and the assets, and it can be larger or smaller than 30%, or challenged by the IRS.

How it works

1. Form the entity. Your attorney forms a limited partnership or LLC with a written agreement that limits transfers and puts management with you.
2. Fund it with real assets. Rental real estate, investment accounts, or business interests, retitled to the entity. Keep enough outside it to live on.
3. Get an appraisal. An independent appraiser values the interests to be gifted.
4. Gift interests and file Form 709. Gifts are reported with the appraisal attached, which starts the IRS review clock.
5. Run it like a business. Separate bank accounts, a partnership tax return each year, distributions by percentage of ownership, and records of decisions.

Who it fits

• Families whose estates may pass the $15 million per person exemption, especially with growing real estate.
• Owners who want to keep management and control while ownership passes to the next generation.
• Families who want to keep property together, protect it from outside claims, and teach the next generation to manage it.

When it doesn’t fit

• Estates well below the exemption, where keeping the step-up in basis is usually worth more.
• Owners who need the assets or their income to live on.
• Late-in-life plans set up mainly to save estate tax.

The rules

• Section 2036. If you keep the use or benefit of the assets, such as living in partnership property rent-free or paying personal bills from its accounts, the IRS can pull the assets back into your estate at full value.
• Real reasons beyond taxes. Courts look for legitimate non-tax purposes, like centralized management, keeping property together, or protection from creditors.
• Adequate disclosure. Gifts reported with a qualified appraisal and full details start a three-year IRS review period.
• Carryover basis. Gifted interests keep your basis, so heirs may owe capital gains tax when the assets are sold.
• Annual exclusion. Smaller gifts of interests, up to $19,000 per recipient per year (2026), use no exemption.

Risks and costs to weigh

• IRS challenges. Discounts are a frequent audit issue. Formalities and records matter.
• Costs. Legal formation, appraisals for every gift, and an annual partnership tax return.
• Family dynamics. Children become owners with rights under the agreement. Plan for that.
• A team effort. You’ll need an estate attorney, an independent appraiser, and your tax strategist.

How we handle it for clients

With a Cannon & Brown tax plan, we look at whether a family partnership fits your goals, coordinate with your attorney and appraiser, prepare the partnership returns and gift tax returns, and keep the books clean so the entity is run the way it should be. Because our technology keeps your books current all year, the records that support the plan are always in order. Your tax strategist reviews every recommendation.

Illustrative example. The family and figures on this page are hypothetical, used to explain how the strategy works. They are not a client and not a promise of results. The example assumes $10 million of assets, gifts of 49% limited partner interests, a 30% combined discount supported by an independent appraisal, an estate that will be taxed at 40%, and no other gifts. Actual discounts vary and can be challenged. This page is educational and is not tax or legal advice for your situation; tax rules and limits change.