A family limited partnership is a holding vehicle. A general partner manages. Limited partners hold the economics and, if the agreement is real, do not run the business. When the limited partner is an irrevocable trust, the donor can give away a non-controlling interest without handing a child a checkbook, and the interest that was given can be valued as what it is: a limited, illiquid stake, not a proportionate slice of the underlying assets at a control price. That combination — governance, a place to park a gift, and a supportable discount — is what the structure does well. It is also what fails when the partnership is a paper wrapper around assets the donor still treats as personal.
Referring advisers see both versions. One is a partnership that has a bank account, a manager with actual authority, and a trust that has been a partner for long enough that the next transaction — a rollover, a partial sale, a recapitalization — happens at the partnership. The other is a partnership formed after a term sheet, funded with the founder's stock, and ignored until someone asks whether the gift used less of the lifetime exclusion than a gift of the shares outright. This article is about the difference. It is not tax advice. Valuation and estate inclusion are facts, and your tax adviser has to sign the return.
What the Partnership Is For
Used properly, the LP does four things that a direct gift of shares does less cleanly. It puts management in one place, so a sale, a capital call, or a custody account has a single actor. It lets the family give economic interests in fractions, including to a trust, without registering every beneficiary as a shareholder of the operating company. It can keep a concentrated position — a company, a fund stake, a portfolio — under an investment policy instead of letting each gift splinter it. And it produces an interest that a willing buyer would discount, because a buyer of a limited-partner unit cannot force a sale, cannot hire the manager, and often cannot sell without consent.
A trust as limited partner is the estate-planning layer. A completed gift is a gift of the LP interest; later appreciation accrues to the trust, and only what the donor kept stays in the estate. That is the pattern in Rollover Equity: Transferring Interests Before the Valuation Step-Up and, on a longer clock, in gifting ahead of a liquidity event. The partnership does not replace the trust instrument, and a Canadian, Delaware, or other seal does not answer U.S. estate-tax situs. A Canada LP can be the right commercial wrapper and still be a classification question. See The Form 8832 Election in Offshore Holding Structures.
Where Section 2036 and the Cases Draw the Line
Section 2036 includes in the gross estate property the decedent transferred, if he or she retained the possession or enjoyment of the property or the income from it, or retained the right — alone or with any person — to designate who enjoys it. Section 2038 reaches a retained power to alter, amend, revoke, or terminate the transfer. Both have an exception for a bona fide sale for adequate and full consideration. The exception is not satisfied by a recital. The Tax Court in Estate of Bongard v. Commissioner, 124 T.C. 95 (2005), required a legitimate and significant nontax reason for the transfer. Saving gift and estate tax is not that reason. Keeping a family business under one investment policy, bringing in active management, or pooling assets that will actually be managed together can be — if the record shows it.
Estate of Strangi v. Commissioner, T.C. Memo. 2003-145, affirmed by the Fifth Circuit, is the case advisers mean when they say the partnership was disregarded. The decedent, through others, moved assets into a family partnership shortly before death and in substance kept the enjoyment. Personal expenses were met from partnership property. The formalities did not match the way the assets were used. The court included the transferred assets under Section 2036(a)(1). The lesson is not that every family partnership fails. It is that an implied agreement to keep the income and the use of the property is enough, even when the agreement says the opposite.
Estate of Powell v. Commissioner, 148 T.C. 392 (2017), is the deathbed version, and it is sharper on control. The Tax Court held that a decedent who, with the other partners, could dissolve the partnership had retained a right to designate who would enjoy the property, and included the assets under Section 2036(a)(2). The practical point for a founder who "just wants to stay as GP" is uncomfortable: a right held with the family to liquidate, or to direct distributions, can be the retained string. Powell also discussed the risk of counting the same value twice and the Section 2043 offset. That is a tax-adviser question after inclusion has already happened. The planning question is how not to get there.
Holman v. Commissioner, 130 T.C. 170 (2008), affirmed, 601 F.3d 763 (8th Cir. 2010), is the mixed result, and it should be read for both halves. Living donors funded a partnership with Dell stock and gave limited-partner interests to their children. The courts treated the gifts as gifts of partnership interests, not as gifts of the underlying shares: the entity was respected at that level, in a case where value could still move between the contribution and the gifts. Section 2703(a) nonetheless required the interests to be valued without the agreement's transfer restrictions. Those restrictions failed the bona fide business-arrangement test in Section 2703(b). Lack-of-control and lack-of-marketability discounts were still litigated; they came out smaller than the discounts on the gift-tax returns. Holman is not a holding that a family partnership produces the discount the family claimed. It is a holding that the interest given can be a partnership interest, and that restrictions in the family's own agreement may still be ignored.
Valuation Discounts, Without the Folklore
A limited-partner interest is often worth less than its pro rata share of net asset value, because of lack of control and lack of marketability. The size of that difference is an appraisal question. It is smaller when the interest is a large vote, when distributions are mandatory, when the term is short, or when the only asset is cash that will be distributed after a sale that is already signed. It is attacked when the restriction was added for the gift and can be removed by the donor's family.
Section 2703 says value is determined without regard to an option, agreement, or restriction, unless the arrangement is a bona fide business arrangement, is not a device to transfer property to the family for less than full consideration, and is comparable to arm's-length deals. Section 2704 disregards certain "applicable restrictions" on liquidation that are more restrictive than the default rule under state law and that the family can lift. Section 2701 is the other trap, and it shows up in recapitalizations: a donor who gives the junior interest to family and keeps a preferred or other applicable retained interest that is not a qualified payment can have that retained interest valued at zero, so the gift is far larger than the "discounted LP unit" the model showed. Chapter 14 does not impose a flat ban on lack-of-control and lack-of-marketability discounts. It disregards the restrictions and retained rights that are not real. Proposed regulations that would have gone further under Section 2704 were withdrawn. Current law is the statute and the cases, applied to the agreement you actually have.
For 2026, the basic exclusion amount a U.S. citizen or domiciliary uses against a taxable gift is $15 million, and the annual exclusion for a present interest is $19,000 per donee, both as confirmed in Rev. Proc. 2025-32. A supportable discount changes how much of that exclusion a given economic gift consumes. An unsupported discount changes how the examination ends. Adequate disclosure on Form 709 — the appraisal, the method, the parties — is what starts the limitations period. We cover the return in the rollover article and the sequence in the liquidity-event timeline.
Governance That Survives a Reading of the Cases
The agreements that hold up have a manager who manages. If the general partner is the donor, the retained powers have to be read against Sections 2036, 2038, and 2701 before anyone assumes the gift is complete. Many families put a corporate general partner between the donor and the partnership, and then have to be honest about who directs that corporation. A donor who controls the GP, and through it every distribution and liquidation decision, has recreated the string Powell discussed. An independent manager, a real investment policy, and distributions made pro rata under the agreement are the opposite fact pattern.
Formalities are the record an examiner reads. Capital accounts, a separate bank account, no payment of the donor's personal expenses, books that match the agreement, and partners who were partners before the liquidity event are what make the vehicle a partnership to be valued, rather than a Strangi-type arrangement whose assets are included in full. A trust that is a limited partner needs its own trustee action, its own EIN where the instrument requires one, and a decision about whether the trust is a grantor trust. A foreign trust raises the FGT and FNGT questions in FGT vs. FNGT for International Families. A sale to the trust, instead of a gift, raises the note, the rate, and the seed gift in Selling to an Intentionally Defective Grantor Trust Versus Gifting.
International Families, and a U.S. Person Already in the Picture
For a non-resident alien donor, a partnership interest is generally intangible property. A gift of it is generally outside U.S. gift tax under Section 2501(a)(2). That does not make the partnership a device for moving U.S. real estate or tangible property out of the gift tax, and it does not answer estate-tax situs at death. The gift-tax rule and the estate-tax rule are different statutes. See U.S. Gift Tax for Non-Resident Aliens. If the partnership is classified as a corporation for U.S. tax purposes, the interest is stock, and any U.S. person who owns it has a PFIC or CFC question rather than a partnership question.
The usual U.S.-person fact is someone already in the family who becomes a U.S. person — a green card, substantial presence, a change in domicile — or a child born a U.S. citizen, or a family that already has a U.S. person on the partner register. That person may have to file Form 8865, may be attributed ownership, and may have PFIC exposure if a foreign corporation sits in the structure. Section 679 can treat a U.S. person who transfers property to a foreign trust with a U.S. beneficiary as the owner of the trust. The partnership agreement will not say any of that. The owner chart will. See When a Family Member Becomes a U.S. Person.
A family limited partnership is worth using when it will be operated as a partnership: a nontax reason that a third party would recognize, governance that does not leave the donor with the enjoyment and the liquidation right, and a valuation that reports the interest that was transferred. It fails when it is a discount memorandum stapled to assets the founder still lives on. Counsel's job, on a private wealth matter, is to tell the referring adviser which of those two partnerships the family actually has — before the gift, and before a buyer asks who owns the equity.