A Family Limited Partnership ("FLP") is no different than a regular Limited Partnership. It gets its name from the obvious: its generally formed and maintained by family members. An FLP can offer get opportunities to consolidate the management of family assets as well as a vehicle to make gifts without relinquishing control.
Because of the complexities involved, FLPs are not inexpensive to create nor are they inexpensive to maintain. In fact, they are real businesses that need to be treated as such.
FLPs have been under much IRS scrutiny due to perceived abuses by taxpayers. Because of this scrutiny, you would be well served to consult qualified tax attorneys and accountants to make certain that an FLP is worthwhile for you given your present circumstances.
You may be better off setting up a regular Limited Partnership instead of a Family Limited Partnership because of the possible IRS scrutiny. But if you think about it, there has to be a compelling reason to set up any kind of partnership. Why not form an LLC? Then you can have the liability protection similar to that of a corporation, but you could be taxed like a partnership.
Notwithstanding the above advice, all of which is correct, the general answer to your question is that a FLP is often used as a device to reduce someone's gross estate for purposes of minimizing estate tax liability upon his or her death.
The way it works is that the owner of a business forms a FLP and transfers the business and all its assets to the FLP as a capital contribution. He then transfers ownership units (which are the equivalent of stock shares if we were talking about corporations) in the FLP to his or her family members (there are important tax ramifications depending on the manner in which the ownership interests are transferred to the family members, and a full discussion would be outside the scope of this very general answer). The idea is that without the FLP in place, the full value of the business will be included in the business owner's gross estate upon his or her death. However, with the FLP in place, instead of the full value of the business being included in the gross estate, only the value of his or her portion of the ownership interests in the actual FLP will be included, which in addition to being diluted by virtue of the other owners of the FLP, may qualify for lack of marketability or other applicable valuation discounts.
Please note, this is being provided as general information, and is not intended, and may not be relied on, as legal advice. Given the fact that FLPs are under heightened scrutiny by the IRS, it is crucial to speak with a tax attorney before making any decisions with regard to this or any other estate and/or succession planning device.