Family Limited Partnerships: How to Lock In $4 Million in Valuation Discounts Before Congress Acts Again

A 72-year-old couple with roughly $11 million in net worth spent late 2025 racing to shrink their taxable estate before the Tax Cuts and Jobs Act exemption was scheduled to sunset on January 1, 2026, potentially cutting the per-spouse shelter from $13.99 million to roughly $7 million. They moved $4 million of family business and rental real estate interests into a Family Limited Partnership, gifted limited-partner units to their children and grandchildren, and locked in valuation discounts before year end. Congress then extended the higher shelter through the One Big Beautiful Bill, lifting the 2026 exemption to $15 million per decedent. The strategy still worked anyway.

What this couple actually faced

The setup is common among the mid-eight-figure crowd: illiquid family assets, a control-conscious senior generation, and a hard legislative deadline. On a finance forum last fall, one poster summarized the panic well, writing that his parents’ advisor told them to “gift now or watch the IRS take 40 cents of every dollar above seven million.” That number was real even if the deadline shifted.

1. Ages: Both spouses 72 and in good health, meaning a planning horizon long enough that compounding outside the estate matters more than liquidity inside it.
2. Net worth: ~$11 million (operating business, rental real estate, taxable brokerage account, and primary residence), so a meaningful share is illiquid and hard to value precisely.
3. Heirs: Two adult children and four grandchildren, which gives them six natural donees for annual exclusion gifting and a multi-generational reason to use a vehicle that can hold assets together.
4. Core decision: Move appreciating assets out of the estate now while the exemption is historically high, or hold and accept the risk that future appreciation gets taxed at the federal estate rate.

The one number that drives the whole decision

The tension is growing inside the estate versus growth outside the estate.

Every dollar of future appreciation on assets the couple still owns at death gets taxed at a federal estate rate of 40% above their combined exemption. An FLP attacks that by gifting limited-partner units, an appraiser can discount for lack of control and lack of marketability, typically 20% to 35%.

On their transfer: A $4 million block of underlying assets contributed to the partnership, then gifted as non-controlling LP units with a 30% discount, shows up on Form 709 at roughly $2.8 million. They used the annual exclusion of $19,000 per donor per donee (two spouses times six family members is $228,000 a year off the top) and applied the lifetime exemption to the rest. The $4 million, plus every dollar of growth on it, now compounds outside the taxable estate. If a future Congress drops the exemption and that $4 million doubles by their deaths, they have removed roughly $1.6 million of federal estate tax from the equation. With the 10-year Treasury near 4.6%, the opportunity cost of leaving appreciating private assets inside the estate is not trivial.

The realistic paths from here

1. Use an FLP with disciplined governance. This is what they did. It works best when the partnership owns a real operating business or income-producing real estate, holds regular meetings, distributes cash pro rata, and never serves as the couple’s personal checkbook. Sham FLPs lose in Tax Court routinely.
2. Skip the FLP and use a SLAT or direct gifts. A spousal lifetime access trust gets assets out of the estate without partnership complexity, but you lose the valuation discount. Best for liquid portfolios where 30% discounts are not defensible anyway.
3. Do nothing and rely on the $15 million shelter. Reasonable for couples whose combined net worth is comfortably below $30 million and who live in states without their own estate tax. Risky for anyone above that line or in Massachusetts, Oregon, Washington, or New York.

What to evaluate first

Pull a current balance sheet and project it forward 15 years at a realistic growth rate. If the projected estate stays under the combined federal exemption and your state has no estate tax, the FLP’s complexity is not worth the legal and appraisal fees, which often run $25,000 to $75,000 to set up. If the projection clears the exemption, the expensive mistake is waiting. Discounts work best on assets gifted years before death, because the IRS scrutinizes deathbed FLPs aggressively under Section 2036 and frequently pulls the assets back into the estate at full value.

This couple did the one thing that matters most: they moved early, documented a genuine business purpose, and let the partnership operate at arm’s length.