housands of family-owned businesses fail in America after the family patriarch and company founder dies, leaving the heirs with tax bills so huge that the company's assets are bundled up and sold. Many of those businesses could have survived if the founder had simply created a family limited partnership, or FLIP.

A FLIP is one of the best tax strategies available to small, family-run enterprises. It's not only used for small family-run businesses, but also by families who own properties like second homes, real estate or other income-producing assets.

A FLIP is a limited partnership where all of the partners are family members. A limited partnership has special characteristics that are important to understand. With a limited partnership, all "limited" partners have no rights whatsoever in the management of the partnership operation. Full and absolute control over the operations of the partnership entity is given to and kept by the general partner. Typically, the general partner is the family member who runs the business.

This leads to two tax-enticing benefits: A FLIP allows you to give away property today at a discounted value, while retaining control over the business. In fact, you can stay in charge for the rest of your life and the life of your spouse, or whichever family member you choose as the next general partner.

The typical situation is families where parents want to transfer property to their kids but still want to control the business. I would set up a FLIP with the parents as general partners. I would then transfer ownership title to the FLIP and set up the kids as members of the limited partnership. If the general partnership interest is 1 percent, and the limited partnership interest is 99 percent, then the parents just gave away 99 percent of the business without giving up one iota of control.

Here's how to get the discount on the gift property and avoid or eliminate the gift/estate tax. The gift/estate tax is an excise tax on the transfer of property, either during your lifetime (gift) or at death (estate). Because the recipient of the property is unable to control that property (remember, he or she is a "limited" partner), the value of the gift is less than the value of the property. For example, if you could buy an item for $100, you surely would pay less than $100 for that item if you had no control over it.

If the general partnership interest is 1 percent and the limited partnership interest is 99 percent, then 99 percent of the property has been transferred with a discount. While the magnitude of the discount depends upon the nature of the property transferred, discounts have averaged as much as 40 percent. When the first dollar of transfer tax is at a rate of 37 percent, a 40 percent discount saves substantial dollars.

For example, assume a husband and wife have an estate in the 50 percent tax bracket, which is not unusual when all taxes are considered. For 1998, there would be no tax on the first $1.3 million of assets in that estate, if it was set up correctly. However, if a FLIP is created with a 40 percent discount, more than $2 million can be transferred tax-free.

Remember that 99 percent of the assets now belongs to the kids. If the parents live another 20 years and the assets only appreciate at 7.2 percent a year, you could save those kids more than $1 million in estate taxes. That's even after taking into account that the estate tax exemption for small businesses will be rising over the next several years.

A FLIP not only saves you gift and estate taxes, but it could save you income taxes as well. For example, assume the assets in the FLIP generate $100,000 in income. Because the parents own 1 percent of the FLIP, they are taxed on just $1,000. The kids, who own the other 99 percent, are taxed on the other $99,000. Had the FLIP not been used, all of the income would be taxed to the parents, who often are in a higher tax bracket. By using the FLIP, $99,000 is now taxed at a lower rate.

Here's another advantage that has nothing to do with taxes. You can use a FLIP for asset protection. If you're a doctor, lawyer or anyone whose activities put them at risk, you can protect those assets with a FLIP.

Remember that before you had the FLIP, you owned all of the assets. Your creditors could have gone after all of them. But now the FLIP owns the assets and you only own 1 percent of that FLIP. That means the other 99 percent is now protected from your creditors.

So what happens if the creditor sues your children? State law normally provides that if someone successfully sues a limited partner, the only thing that creditor can get is what's called a "charging order." A charging order essentially establishes the creditor as another limited partner.

Now if you're still in charge of the partnership as its general partner, the creditor should be worried. A limited partner is taxed on the percentage of income earned by the partnership. In the above examples, if there is a charging order against the kids, and if the partnership earned $100,000 that year, the creditor is equally liable for the $99,000 of income that the limited partners supposedly earned.

But don't forget that you're the general partner. And as general partner, you have the absolute authority to distribute - or not distribute - any cash. In other words, if you decide not to distribute any of this $100,000, then the creditor is taxed for "phantom" income by the government. When explained to a potential litigating creditor, or an ex-spouse in a divorce settlement, they quickly lose interest in grabbing limited partnership shares.

This loophole is one of the reasons the Clinton administration has now said it wants to eliminate FLIPs. But the Republican-controlled Congress is interested in cutting taxes, not raising them, and small business owners are some of the Republicans' biggest supporters. The bottom line: Don't expect FLIPs to go away anytime soon.

Drafted correctly, a FLIP gives you an immediate gift or estate tax savings, removes almost all of the appreciation in your assets from your estate, provides potential current income tax savings, and gives your assets substantial protection from creditors.

It does have some disadvantages. The kind of property that the FLIP can own may be limited (for example, no more than 80 percent of the value should come from publicly-traded investments), and the gift is a complete gift. That means that you can't take it back. You can, however, control it for the rest of your and your spouse's lives.

How do you get money out of the FLIP? The general partner is allowed to take compensation. But that would be taxable to you. You could also get reimbursed for the expenses of the partnership. But that's not usually a lot of money.

What I recommend my clients do is borrow the money from the FLIP. They would have to sit in front of a mirror and negotiate with themselves (as general partner). If you're general partner, it's like being president of the bank with no limit on what you can do. The borrowed money would not be additional income to you (you have the obligation to pay it back) and, if you die owing the money, that debt reduces your estate and saves you even more in taxes.

For example, assume you borrow $50,000 from the FLIP every year for 20 years and then you die. You now owe, in addition to interest, $1 million to the FLIP. That million becomes a debt against the estate and, in the 50 percent bracket, saves your family an additional $500,000 in estate taxes. In effect, by structuring the arrangement with a FLIP, dollars that would have been taxed in your estate before going to your family, go to them instead as non-taxed debt repayment.

The benefits of FLIPs are incredible, but they're complicated and require professional advice. Know what you're getting into before you do it.