Family limited partnerships allow parents to give their children shares of an asset--such as a family home, business or rental properties--while retaining control, said Mark Luscombe, principal tax analyst with CCH Inc., a Riverwoods, Ill.-based tax research and publishing firm.

This also provides some protection against lawsuits and creditors, who typically can go after only the parents' ownership interest in the property.

Because the partnership shares would be difficult to sell, the parents are allowed to discount their value so may pass more property to their children without triggering gift tax rules, Luscombe said. People can give a certain amount during a lifetime--in 2000 and 2001 the limit is $675,000--without having to pay gift taxes on their largess.

For example, a $2-million family business might be valued at a 35% discount, or $1.3 million. Since each parent is allowed to pass on up to $650,000 this year without having to pay gift taxes, the entire value could be transferred without tax.

Acceptable discount rates seem to range from 25% to 40%, depending on the asset and the IRS office that scrutinizes the return, said Charles P. Rettig, a tax attorney with Hochman, Salkin, Rettig, Toscher & Perez in Beverly Hills.

"If you get to 40%, you're starting to push it, although discounts of as much as 60% have been accepted," Rettig said.

Parents also can effectively transfer income and deductions from the property to their children--often to move the income from their higher tax bracket to their children's lower one, or to otherwise increase the value of the deductions. A safe stance--one that can be defended in an audit--would be to make sure the amount apportioned reflected the children's interest in the property. Thus, if a child had a 10% share in the property, 10% of the income or deductions would go to that child, Luscombe said.

Taxpayers also must have a legitimate, non-tax reason for setting up the partnerships, such as passing control of a business to the next generation, Luscombe said.

Setting up and administering these partnerships can be complicated and expensive, requiring professional advice and annual partnership reporting to the state. That's why most estate planners recommend them only when families have a business or real estate worth more than $2 million.