(FORTUNE Magazine) – A FAMILY LIMITED PARTNERSHIP is no longer just a legal structure for setting up the family business. Instead, it's fast becoming a cutting-edge tool for estate planning. Such partnerships offer all kinds of payoffs, but two major attributes make them especially attractive to anybody who'd rather keep his assets in the family and out of Washington's hands: First, as general partner you can retain control of the assets throughout your lifetime; second, you can minimize transfer taxes by gifting or willing interests, as the pieces of a partnership are called, to family members at deeply discounted values. The discounts reflect the fact that assets locked up in the partnership are worth less to the outside world.

The popularity of family limited partnerships in estate planning has soared since 1993. That's when the IRS legitimized these types of discounts, which can run to more than 40%--no small amount when making your plans.

Usually, parents ask their lawyers to set up a partnership naming themselves as general partners. They retain financial and managerial control of the assets and then convey limited partnership interests to other family members, their kids probably. In one sense, limited partnership interests are dead-end investments. "You have no guaranteed rights to income as a limited partner. Typically, you can't transfer your interest without consent of the general partners or get capital out until the partnership ends," says Cornelius "Neil" Coghill, an estate planning attorney with Womble Carlyle Sandridge & Rice in Winston-Salem, North Carolina. In other words, outside investors have reason to consider limited partnership interests far less valuable than the assets those partners actually own.

Thus the value of a piece of the partnership, when conveyed as a gift, is greatly reduced. Say you set up an office building partnership valued at $1 million and decide to give your son a 50% interest as a limited partner. While the market value of 50% of the property may be worth $500,000, you can discount that amount when filing a gift tax return, since your son can't sell his 50% interest without your consent. Any gift or transfer tax will be calculated on the discounted value. Though you retain control of the asset, the part you gifted is no longer in your estate.

Julius Berman, an attorney with Kaye Scholer Fierman Hays & Handler in New York City, is setting up one of these partnerships for his own family as a way for each of them to make investments in all kinds of areas, including the stock market. Twelve family members will pool resources to invest through the partnership, and future grandchildren will become limited partners as they are born. Berman and his wife will be the general partners, and his children and grandchildren will be limited partners. With their money pooled, these folks can qualify for some investment funds that cater exclusively to the big-money crowd.

Berman, who has the biggest single investment in the partnership, also will be able to gift some assets through the partnership to his family now. "I didn't want to wait until after the proverbial age of 120 and then let them inherit whatever I had left," he says. "Now we can have the benefits of group investment, but I can also use the expertise and experience that I developed over the years. At the same time, my children and grandchildren can receive the economic benefits of that."

Don't get the idea from such munificence that the IRS is getting soft. For one thing, the agency will be checking to make sure the partnership serves a legitimate business purpose. For example, you can't say that an oceanfront dream house is designed to generate income unless you actually rent it. Every type of partnership also must be realistically appraised, but especially those investing in real estate or closely held corporations.

Beyond that, some worry that the family limited partnership gravy train is in for a short run. Says Coghill: "If it works too well and seems too good to be true, at some point it's possible the IRS is going to take a second look." Coghill is less concerned with family limited partnerships that invest in commercial real estate, a long-standing use that he says serves a legitimate business purpose. He worries about partnerships set up for family vacation homes, a tax play that is on the increase.

Estate planners worry that the IRS may someday question partnership portfolios of publicly traded securities. So, get in on the action while you still can. "It's like any other aggressive tax-planning technique," says Coghill. "With the benefits comes the risk element."

--Suzanne Barlyn