What Is A Family Limited Partnership?
dan • August 21, 2022
Families that own and run successful businesses together often face several challenges. The successful transfer of a business is one of the most notoriously difficult problems in estate planning.
Many times, the generation that created the business wants to transfer that business to future generations – eventually. In the meantime, they want to maintain control. So the first problem is how to both maintain control while transferring management, knowledge, and eventual ownership to the next generation.
The other common problem is that, usually, different family members have different levels of interest and participation in the family business. The family members who have high levels of participation and interest might feel as though they deserve a larger share, or even the whole thing, when the founding generation eventually moves on, given the amount of time and effort they have contributed over the years. The less interested family members may not necessarily want the business, but that doesn’t usually mean they are okay with being disinherited. The more interested family members may feel resentful of less interested family members receiving the same ownership interest as they have. The less interested family members may feel resentful about the more interested family members having been handed a career.
And then, of course, one of the biggest threats to the longevity of family businesses is outsides becoming involved, especially if it happens involuntarily via divorce or creditor problems.
Many times, the generation that created the business wants to transfer that business to future generations – eventually. In the meantime, they want to maintain control. So the first problem is how to both maintain control while transferring management, knowledge, and eventual ownership to the next generation.
The other common problem is that, usually, different family members have different levels of interest and participation in the family business. The family members who have high levels of participation and interest might feel as though they deserve a larger share, or even the whole thing, when the founding generation eventually moves on, given the amount of time and effort they have contributed over the years. The less interested family members may not necessarily want the business, but that doesn’t usually mean they are okay with being disinherited. The more interested family members may feel resentful of less interested family members receiving the same ownership interest as they have. The less interested family members may feel resentful about the more interested family members having been handed a career.
And then, of course, one of the biggest threats to the longevity of family businesses is outsides becoming involved, especially if it happens involuntarily via divorce or creditor problems.
Many of these issues can be addressed with business entities designed specifically for the purpose. One flexible and powerful arrangement is a family limited partnership.
What is a family limited partnership?
A family limited partnership is a business partnership formed under state law, with two more family members controlling the day-to-day operation of the business as its “general partners.” The partnership is “limited” because, unlike traditional partnerships, these are arranged under state laws specifically allowing certain people to be given partnership interests without taking on liability for the partnership.
The non-controlling partners are “limited partners.” Limited partners are entitled to share in the business’s profits, but they do not have a right to participate in its day-to-day management. The benefit of not having the right to participate in the business’s day-to-day management is that limit on liability for the business’s debts and liabilities.
The characteristic that separates a family partnership from other types of partnerships is the restrictions on to whom ownership can be transferred. Typically, transfer options are tightly limited to other family members. 
The non-controlling partners are “limited partners.” Limited partners are entitled to share in the business’s profits, but they do not have a right to participate in its day-to-day management. The benefit of not having the right to participate in the business’s day-to-day management is that limit on liability for the business’s debts and liabilities.
The characteristic that separates a family partnership from other types of partnerships is the restrictions on to whom ownership can be transferred. Typically, transfer options are tightly limited to other family members. 
Advantages of a family limited partnership
A family limited partnership:
- Allows the founding generation to remain in control of the business while establishing a structure through which to transfer ownership in the business to future generations.
- Gives the founding generation a way to transfer ownership of the business to family members in a manner that reflects their interest and involvement in the business. As described above, it is very common, in families that own businesses, for some members to be more interested or involved in the business than others.
- Limits who can become a member of the business. Perhaps the biggest risk that family business face is that ex-in-laws will gain ownership interests through divorce.
- Provides asset protection. The only members of a limited partnership that potentially have personal liability are the “general partners.” Limited partners do not. We further limit the potential for a partner’s creditors to get to partnership assets by, for example, requiring a super majority for certain actions or requiring unanimous agreement among the partners to liquidate the partnership’s assets or dissolve the partnership. Further protection can be built in by including layers of protection, such as LLCs, within the partnership.
- Can minimize taxes. Often the value of the assets inside of a family partnership exceed the value of the partnership itself. How can that be? Because the limits on control over the business or who can it be transferred to diminish its value. Would you pay $5 million for a business that had $5 million of assets if you knew you would never have any right to control or direct how those assets were used?
- Allows for flexibility. Unlike trusts, a family limited partnership can provide asset protection and tax minimization while still allowing the founders to change the entity’s governing terms.
Words of caution
To the extent you do end up using your family partnership to avoid debts or minimize taxes, you better be prepared for the possibility that a court or the IRS are going to closely scrutinize it. As a society, we don’t want to make debt or tax avoidance easy.
What will they be looking for? The following scenarios can result in a loss of the benefits a family partnership is supposed to provide:
What will they be looking for? The following scenarios can result in a loss of the benefits a family partnership is supposed to provide:
- Commingling the partnership’s assets with your personal assets. The partnership should be limited to holding business and income-producing assets. Trying to extend the protection to your personal life by putting your house or cars in the trust blurs the line between the two.
- Using the partnership’s bank account to pay your personal expenses. If you need money to pay your personal expenses, you should go through the hassle of making a profit distribution and then using the funds that you received to pay those expenses. Using the partnership bank account or credit card to buy your groceries, for example, is another form of comingling.
- Receiving income that was produced by a partnership asset directly. Sometimes people will put rental properties into their partnership, and then have the rent paid directly to them. Again, the income should go to the partnership first and then be distributed as a profit.
- Living in a property that is owned by the partnership, rent free. No true business would allow someone to live in its properties for free. If you are living in a property that is owned by the family partnership, you not only need to pay rent, but fair market rent.
- Transferring all your assets to the partnership. Sometimes, people get excited about the asset protection potential a partnership provides and try to transfer everything into it. A critical part of asset protection, however, is not to make yourself insolvent. You need to keep enough assets in your name to cover your expected personal expenses and liabilities.
- Having no reason to set up the partnership other than tax minimization. The IRS requires that these types of entities have a purpose beyond just tax avoidance. That additional purpose can include consolidation and organization, asset protection, and other typical business purposes.
Conclusion
If you own a business that you are interested in keeping in your family while also achieving tax and asset protection benefits, you should consider adding a family partnership to your estate plan.

What next? 
If you think it might be time to think through your estate plan, you can:

- Give us a call at 720-821-7604 to schedule a "Discovery Session" at which we can determine whether our firm would be a good fit for your needs. Or fill out our contact form to have us call you.
- Visit our estate planning page to learn more about how proactively thinking through your estate plan can protect you and your family, minimize hassle, lower the chance of family discord, and minimize or eliminate taxes.
- Learn more by reading our blog or watching our videos .
Differences Between a Trust and a Will in Colorado
Who Can I Name as an Heir in Colorado?
Consequences of Dying Without a Will in Colorado
What Types of Assets Can Be Included in a Colorado Trust?
What is a Guardianship and When Do I Need One?
What Are the Required Documents to Create a Will in Colorado?
Dealing with the death of a loved one is never easy, and navigating the legal process that follows can add stress during an already difficult time. In Colorado, probate is the legal process by which a deceased person’s estate is administered, their debts are paid, and their assets are distributed to beneficiaries. Whether you’re an executor, beneficiary, or family member, understanding how probate works in Colorado can help you anticipate the steps involved and your potential responsibilities. This blog post will provide an overview of the probate process in Colorado, outline when probate is necessary, and offer guidance on how to navigate the system effectively.  What is Probate? Probate is the legal process that occurs after someone dies to ensure their assets are distributed according to their will or, if there is no will, according to state law. The probate process includes validating the will, inventorying the deceased’s assets, paying off debts and taxes, and distributing the remaining assets to the rightful heirs. While probate is often associated with lengthy court proceedings, not all estates require formal probate. Colorado offers several options depending on the size and complexity of the estate, which can help simplify the process in many cases. When is Probate Necessary in Colorado? Probate is not always required in Colorado. Whether an estate must go through probate depends on the types and value of the deceased’s assets. Generally, probate is necessary if: The deceased owned real estate solely in their name. The deceased’s assets, such as bank accounts or investments, were not held in joint tenancy or designated to transfer on death. The deceased had personal property valued at over $74,000 (as of 2023). If an estate falls below this threshold and does not include real estate, the beneficiaries can often use a Small Estate Affidavit to claim the assets without going through probate. Types of Probate in Colorado Colorado has three main types of probate procedures: small estate procedures, informal probate, and formal probate. The type of probate required depends on the estate’s value and whether there are disputes among heirs or creditors. Small Estate Procedure (Collection by Affidavit) The small estate procedure can be used if the value of the deceased’s assets is less than $74,000 and does not include real estate. This process involves filling out a Small Estate Affidavit, which allows the heirs to collect and distribute the assets without opening a probate case in court. It is the simplest and fastest way to handle a small estate. Informal Probate Informal probate is used when there is a valid will and no disputes among heirs or creditors. The process is overseen by a court-appointed Personal Representative (executor), but there is minimal court supervision. Most of the process, such as distributing assets and paying debts, is handled by the Personal Representative, with only basic filings required with the court. Informal probate is less time-consuming and costly than formal probate. Formal Probate Formal probate is required when there are disputes regarding the will’s validity, disagreements among heirs, or if the estate is complex and needs court intervention. The process is supervised by the court, and all major decisions, such as approving the distribution of assets, must be approved by a judge. Formal probate can take much longer and involve more legal fees than informal probate. Steps in the Colorado Probate Process While the specific steps in probate can vary depending on the type of probate and the complexity of the estate, the general process in Colorado typically includes the following: Filing the Probate Petition The process begins with filing a Petition for Probate with the appropriate Colorado probate court. The petition is usually filed by the executor named in the will or an interested party if no will exists. Appointment of the Personal Representative The court will appoint a Personal Representative (executor) to manage the estate. If there is a valid will, the person named as executor is typically appointed. If no will exists, the court will appoint someone, usually a family member, to serve as the Personal Representative. Notice to Heirs and Creditors The Personal Representative must notify all potential heirs and creditors of the probate proceeding. This step is essential for providing an opportunity for interested parties to come forward and make claims against the estate. Inventory and Appraisal of Assets The Personal Representative must create an inventory of all the deceased’s assets and have them appraised if necessary. This inventory will include real estate, personal property, financial accounts, investments, and any other assets owned by the deceased. Paying Debts and Taxes Before distributing assets, the Personal Representative must pay off the deceased’s debts and any taxes owed. If the estate does not have enough assets to cover all debts, Colorado law dictates the order in which creditors are paid. Distribution of Assets Once all debts and taxes have been paid, the Personal Representative can distribute the remaining assets to the beneficiaries according to the will or, if no will exists, according to Colorado’s intestacy laws. Closing the Estate After all assets have been distributed and all required filings have been made with the court, the Personal Representative can file a Petition for Final Settlement to close the estate. Once approved, the Personal Representative’s responsibilities are complete. Challenges and Disputes in Colorado Probate Unfortunately, probate can sometimes become contentious, especially in cases involving high-value estates or when family members disagree on how assets should be distributed. Some common challenges in Colorado probate include: Will Contests Heirs or beneficiaries may challenge the validity of a will, claiming it was signed under duress, there was undue influence, or the deceased lacked the capacity to create the will. Will contests can significantly delay the probate process and require formal probate to resolve. Executor Misconduct If an executor is not fulfilling their duties or is mishandling estate assets, beneficiaries can file a complaint with the court and request the executor’s removal. Disputes Among Beneficiaries Disputes can arise over specific bequests, how assets are divided, or even the valuation of estate property. Mediation or formal court intervention may be necessary to resolve these disputes. How a Colorado Probate Attorney Can Help Navigating the probate process can be overwhelming, particularly when dealing with the emotional aftermath of losing a loved one. An experienced probate attorney can help in several ways: Guiding You Through the Process An attorney can explain the probate process, help you understand your rights and responsibilities, and ensure all legal requirements are met. Managing Court Filings and Deadlines Probate involves numerous legal documents and deadlines. An attorney can handle these tasks, ensuring that everything is filed correctly and on time. Resolving Disputes If disputes arise, an attorney can provide representation in negotiations, mediation, or court hearings to protect your interests and work toward a fair resolution. Minimizing Costs and Delays With the guidance of a skilled attorney, you can often minimize the time and expense associated with probate, helping ensure the process goes as smoothly as possible. How The McKenzie Law Firm, LLC Can Help At The McKenzie Law Firm, LLC, we understand the complexities of the probate process and are committed to helping families navigate it with compassion and expertise. Whether you’re an executor needing assistance with your duties or a family member looking to understand your rights, our experienced probate attorneys can provide the support you need. If you have questions about probate in Colorado or need legal assistance, contact us today to schedule a consultation. We are here to guide you through the process and ensure your loved one’s wishes are honored.
Explore the pros and cons of mailing Notice to Creditor forms in Colorado probate. Learn how this decision impacts estate administration and creditor claim periods.
Understanding Special Needs Trusts in Colorado
Explore the differences between beneficiary deeds and life estates in Colorado estate planning. Learn the pros and cons of each method for transferring property and avoiding probate, and discover when to use each option for your unique situation.