That distinction trips up a lot of families. The FLP might hold $10 million in assets, but a 5% limited partner interest isn't automatically worth $500,000. Discounts for lack of control and lack of marketability exist because a restricted, non-controlling interest simply isn't as valuable to a buyer as a proportional slice of the balance sheet.
This article covers how FLPs are structured, how discounts get calculated, what appraisers look at, why the IRS scrutinizes these transactions, and when to bring in an independent valuation. None of this replaces advice from your attorney or tax professional. Every FLP situation depends on facts, the partnership agreement, and current law.
Key Takeaways
- Lack of control and lack of marketability are the two discounts most commonly applied to FLP interests.
- Discount size depends on the specific interest, agreement terms, asset mix, distribution history, and valuation date.
- Reduce IRS challenge risk with a legitimate non-tax purpose and proper partnership operation.
- Back every gift, estate, or trust filing value with an independent appraisal.
What Is a Family Limited Partnership?
A family limited partnership is a partnership owned by related family members, structured with a general partner and one or more limited partners. The general partner controls investment decisions, distributions, and day-to-day management. Limited partners hold an economic interest but typically have no vote on operations.
A typical setup works like this: a senior family member contributes assets—real estate, a stake in an operating business, or a securities portfolio—in exchange for both general and limited partnership interests. Over time, that person may gift or sell limited partnership interests to children, grandchildren, or trusts.
Whether this structure fits a given family's goals is a legal question. An attorney should make that determination before anything is signed.
Families set up FLPs for a range of reasons, including:
- Centralizing management of scattered or complex assets
- Building a succession plan for a family business
- Keeping assets within the family across generations
- Supporting creditor-protection planning
- Transferring fractional interests without dividing the underlying property
None of these outcomes is guaranteed just because an FLP exists on paper.
Why the Partnership Agreement Drives Value
The agreement itself is where most of the valuation work starts. Voting rights, distribution authority, liquidation rights, transfer restrictions, and rules on admitting new partners all shape what a limited partnership interest is actually worth.
Two FLPs holding identical assets can produce very different valuations if one agreement gives limited partners more say than the other.
Estate-planning uses are one thing. Getting the legal structure, tax treatment, and valuation right is a separate body of work, and it takes coordination between an attorney, a tax adviser, and an independent appraiser.
How Valuation Discounts for FLPs Work
Fair market value rests on a willing-buyer, willing-seller framework: what a hypothetical buyer would pay a hypothetical seller when neither is under pressure and both know the relevant facts.
Revenue Ruling 59-60 established this standard decades ago and rejected any single formula for valuation. That still holds today. A limited partner's pro-rata share of the FLP's net asset value is a starting point, not the answer.
Discount for Lack of Control (DLOC)
A limited partner usually can't direct how partnership assets are invested, approve or block distributions, force a liquidation, or replace the general partner. Those missing rights matter to a buyer. Appraisers review the partnership agreement and applicable state law to see exactly which control rights the interest lacks.
Discount for Lack of Marketability (DLOM)
Private FLP interests don't trade on an exchange. Transfer restrictions, consent requirements written into the agreement, a thin pool of potential buyers, and no set timeline for exiting the investment all push down what a buyer would pay today for the right to cash out later.
DLOC and DLOM Are Not the Same Discount
These two discounts address different problems: one is about control, the other is about liquidity. They shouldn't simply be added together. The IRS Discount for Lack of Marketability Job Aid notes that DLOM is typically applied after a control-related discount, and each should rest on its own supporting evidence rather than a mechanical combination.
Here's a simplified illustration. Say a pro-rata share of net asset value is $100,000:
- Apply a 20% DLOC first: $100,000 × 0.80 = $80,000
- Apply a 15% DLOM to the remainder: $80,000 × 0.85 = $68,000
That's a combined reduction of 32%, not 35%, because the second discount applies to what's left after the first—not the original number.
What Moves the Discount Up or Down
Several factors influence how large a supportable discount actually is:
- Type and diversification of underlying assets
- Distribution history and expected future cash flow
- Debt carried by the partnership
- Transfer restrictions and consent requirements in the agreement
- Partnership duration and expected holding period
- Valuation date and prevailing market conditions
- Applicable state law
- Comparable market evidence
Illustrative discount ranges show up in various studies and court cases, but treating any single percentage as a universal rule is a mistake. Every FLP interest needs its own analysis tied to its own facts.
How an FLP Interest Is Appraised
A defensible appraisal follows a consistent workflow:
- Define the assignment — identify the specific interest, the valuation date, and the purpose of the report.
- Review governing documents — the partnership agreement, amendments, and any side letters.
- Value underlying assets and liabilities — often requiring separate appraisals of real estate, operating businesses, or securities held inside the FLP.
- Select appropriate methods — asset-based, income, market, or some combination.
- Apply supported adjustments — DLOC, DLOM, or other factors tied to the specific facts.
- Reconcile the conclusion — bringing the analysis together into a single supportable value.
The Three Valuation Approaches
Asset-based approach. Common when the FLP mainly holds real estate, marketable securities, or other investment assets. The underlying assets often need their own appraisals before anyone can value the partnership interest sitting on top of them.
Income approach. Relevant when the partnership has a meaningful distribution history or predictable cash flow. The appraiser looks at what a limited partner can realistically expect to receive, adjusted for the risk that distributions don't materialize on schedule.
Market approach. Uses comparable interests or market data where available, but public or unrelated comparables need adjustment for differences in rights, asset mix, size, risk, liquidity, and transfer restrictions. A comparable that looks similar on the surface can be very different once you dig into its governing documents.
What an Appraiser Will Ask For
Expect a document request that includes:
- Partnership agreement and any amendments
- Certificate or formation documents
- Asset schedules and underlying real estate or business appraisals
- Financial statements and tax returns
- Contribution and transfer records
- Distribution history
- Debt information
- Partner ownership records and meeting minutes
Peridot Valuation prepares formal valuations for estate planning, gift and estate tax reporting, trusts, judicial matters, and closely held business interests. Owner and valuator Jack Schroeder, a Certified Valuation Analyst (CVA) and Mergers and Acquisitions Master Intermediary (M&AMI), has prepared more than 80 business valuations, including controlling and minority interests.
That experience matters when an FLP holds an operating business rather than a securities account. The underlying company needs its own credible valuation before the partnership interest can be valued.
None of this is legal or tax advice; it's the appraisal piece of a larger planning puzzle.
IRS Scrutiny and How to Support a Defensible Discount
The IRS doesn't object to FLPs as a concept. What draws attention is whether the entity had a legitimate, substantial non-tax purpose, was funded properly, and was actually operated the way the governing documents describe. Discounts get challenged hardest when the paperwork says one thing and behavior says another.
Risk Factors Worth Flagging Early
- Transfers made shortly before death
- Retained enjoyment or control over contributed assets
- Insufficient liquidity left outside the FLP for the transferor's own needs
- Personal use of partnership assets by the transferor
- Commingling of partnership and personal funds
- Undocumented or inconsistent distributions
- Failure to follow partnership formalities in practice
Treasury regulations add another layer. Under Treas. Reg. § 25.2704-2, certain liquidation restrictions are disregarded for valuation when family members control the entity and can remove the restriction, or when it will simply lapse.
The interest is then valued as though the restriction never existed. That can wipe out a chunk of the expected discount.
Court decisions reinforce the same theme:
- Kimbell v. United States upheld an FLP built around genuine investment and administrative purposes
- Strangi v. Commissioner went the other way: the decedent kept using contributed assets and had partnership funds cover personal expenses, so full asset value returned to the estate
- Estate of Powell treated a retained right to dissolve the partnership (with other partners) as pulling value back into the estate
If day-to-day conduct contradicts the agreement, expect the claimed discount to face a direct challenge.
Building a Defensible File
A qualified appraisal for a gift or estate tax filing should identify the specific interest, valuation date, assumptions, methods used, discounts applied, and supporting evidence, not just a bottom-line percentage. Beyond the appraisal itself, a solid compliance checklist includes:
- Involving estate-planning counsel and a tax adviser early in the process
- Documenting the non-tax purpose in writing, before or at formation
- Executing and funding the agreement correctly and on time
- Keeping separate records and bank accounts for the partnership
- Following distribution and governance provisions as written
- Preserving contemporaneous records of decisions and transactions
- Obtaining updated valuations whenever additional transfers occur or the valuation date changes materially
Practical Planning: When to Obtain an FLP Valuation
A fresh valuation matters most whenever there's a specific transfer, filing, or dispute tied to a specific date. Common triggers include:
- Gifts of limited partnership interests to family members or trusts
- Funding a trust with an FLP interest
- Estate administration after a partner's death
- Buy-sell agreement planning
- Succession planning for a family business held inside the FLP
- Partner disputes or judicial proceedings
- Supporting a tax return position on audit
An old appraisal, or a discount borrowed from an unrelated prior transaction, doesn't hold up well under scrutiny. The valuation needs to reflect the actual transfer date and the precise rights conveyed at that moment.
Partnership agreements, market conditions, and asset mix can all shift year to year, so the analysis has to match that specific date.
CPAs, estate and trust attorneys, executors, trustees, and closely held business owners can work with Peridot Valuation for a fast, affordable, and defensible FLP valuation. Coordinating the appraiser, attorney, and tax professional from the start tends to produce a cleaner file and fewer surprises later.
No valuation firm can promise a particular tax outcome, and Peridot doesn't make that promise either. The goal is a well-supported number that holds up to review.
Frequently Asked Questions
What are valuation discounts for family limited partnerships?
They're adjustments from a proportional share of the FLP's net asset value, applied when the transferred interest lacks control, marketability, or both. The specific amount must be supported by the facts and an independent valuation, not a standard percentage.
What are the advantages of a family limited partnership?
Potential benefits include centralized management, structured family wealth transfer, succession planning, and built-in transfer restrictions. Whether those benefits actually materialize, and what tax result follows, depends on proper legal and tax structuring.
What is the difference between a lack-of-control discount and a lack-of-marketability discount?
A lack-of-control discount reflects reduced decision-making power, such as the inability to force distributions or liquidation. A lack-of-marketability discount reflects the difficulty of converting the interest into cash. They address separate valuation issues and are applied sequentially, not added together.
How are family limited partnership interests valued?
Appraisers review the partnership agreement, assets, liabilities, cash flows, ownership rights, and transfer restrictions as of the valuation date. They apply an asset-based, income, or market approach—or a combination—to reach a supportable conclusion.
Can the IRS challenge valuation discounts for an FLP?
Yes. The IRS may question the partnership's purpose, how it was operated, whether the transferor retained control or benefits, the documentation on file, and the valuation methods used. Current legal and tax advice is necessary for any specific situation.
What documents are needed to value a family limited partnership interest?
Typical documents include the partnership agreement, ownership and transfer records, asset appraisals, and financial statements. Also gather tax returns, contribution and distribution history, debt details, and meeting minutes.
