Wealth Preservation, Trusts and Estates

Family Limited Partnerships

A family limited partnership can clearly be a great estate and business-planning tool but if it is drafted or implemented incorrectly it could cost you money and headaches.  Family Limited Partnerships allow families to own and operate a business or series of investments as part of an executor estate plan to protect both parents and children. In addition, it offers the owners of real estate and closely held business a powerful tool for protecting whole businesses from dissolutions, excess taxes, and claims in divorce or lawsuits.

2011 Pennsylvania Estate Planning News:

IRS Charges the Estate

In the Estate of E.V. Jorgenson the decedent (the person who just passed away) transferred substantial assets to two family limited partnerships and claimed that the retained powers and interests were minimal. The IRS assessed an estate tax deficiency and Tax court found that the decedent had retained the economic benefits and control of such property and that the transfers did not involve a bona fide sale for full consideration. Estate of E.V. Jorgensen, 2011-1 USTC

Why did the taxpayer lose?

Because she had written checks on partnership accounts to pay some personal expenses and make some family gifts.

What does that mean?

Because she maintained too much control of these assets and used them for personal purposes  the value of the family partnership assets were taxed in her estate.

The estate tried to argue that the amounts involved were so small that she really did not have control of the assets but the court did not agree and believed she had access to the funds.

To find out more about tax planning options that could offer significant family tax relief click here to read $ 5 Million Gift Tax Exemption Makes Gifting of Small Business Easier.

What does this mean for you and or your family limited partnership (FLP)?

Transfers of marketable securities, cash or other assets to family partnerships need to have a significant non tax purpose or the court, as it did here, will not consider them a bona fide sale for adequate and full consideration and they will remain in your estate. You and your attorney need to be aware of the heightened scrutiny involved in transferring this type of asset into Family Limited Partnerships FLP’s and its tax and other consequences. The FLP should have a bonafide business purpose and retained control should be minimal.  Using such assets to pay personal expenses will likely cause the technique to fail.

Here are a few questions to think about in considering creating an FLP or transferring or funding your FLP:

• If you were considering funding the FLP with residential or vacation real estate do you want to continue to be able to use that real estate? If so this is not the right tool.  Think instead about a qualified personal residence trust or an outright gift since property values are at historic lows.

• Do you instead need a qualified personal residence trust to implement your above desires?

• What powers or sources of income can be retained without including the FLP in your estate?

• Should you consider a GRAT – Grantor Retained Annuity Trust where some of the assets can be returned to you for your personal use?

If you are not sure of these answers or want to find out more about family limited partnerships contact a wealth preservation attorney to discuss what might work best for you and your unique situation.

Family Limited Partnerships can be a useful tool if they are created and implemented correctly. Figure out what you want to do and then think about the questions above and talk to your attorney or seek an attorney who specializes in wealth preservation to give you all the options available and what possible consequences each of those options may pose.

David M. Frees III, JD For more information about these techniques, call:
610-933-8069  or email dfrees@utbf.com

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The Romney’s 2010 tax return (which is quite  lengthy and can be viewed in it’s entirety by clicking Mitt Romney’s Tax Return) gives us a few hints about trust and estate planning techniques of the wealthy that may have relevance for you – even if your net worth is closer to 1 million dollars than 150 million.

Article By: David M. Frees III, JD

Mitt Romney's 2010 Tax Return

As a matter of side interest, the Romney’s assets were held in a “blind trust” which arguably eliminates or minimizes conflicts of interest for a politicain or officeholder since they no longer know what investments are held by the trust and make no direct investment decisions.

However, the existance or not of a blind trust makes no difference from an estate tax planning perspective.

Why?

Any trust which allows you to continue to use the assets, and/or to control or revoke the trust will generally be included and taxed in your estate.

So what can we tell from his income tax return that might hint as his estate planning and why do you care?

Well, you should care if your assets, including real estate, IRAs and life insurance, business interests and investments exceed $1 million dollars since at the end of this year the amount that can be passed to your heirs without federal estate tax falls back to only $1 million dollars.

And, to make matters worse, the effective rate rises again from 35% to 42-55%.

Since Romney presumably has paid for some very  savvy lawyers, there might be a few lessons here that could matter to you and should be reviewed with your own lawyer before the end of the year.

First, there appears to have been a Grantor Trust established as the return shows income from a trust reported on his return.

If you own a business, certain types or real estate, and other assets and your estate exceeds certain limits, a Grantor Trust, or the sale of assets to a defective grantor trust might be an excellent way to transfer the asset and the growth on the asset out of your estate and further benefit the next generation by continuing to pay all of the taxes due on that income.

It also appears that the Romney’s funded a CRUT or Charitable Remainder Uni-Trust.

The CRUT can be an excellent way to transfer appreciated assets, to get a charitable deduction, and to retain income from those assets for some period of time.

There are lawyers, financial advisers, and accountants who advise the use of these trusts for tax planning alone.  Personally, I believe that they are best suited for those clients with a true charitable intent.

But, if you need income but would like to make a sizable gift to a charity that is important to you, consider and discuss this technique.

The 203 page return reveals the truly complex and seemingly insane level of energy required to comply with the intricacies of the Internal Revenue Code but I’ll take lessons and get ideas for my clients wherever I find them.

If you need information about Grantor Trusts, GRATs or CRUTs or any other planning techniques to protect your surviving spouse or herirs, we are pelased to offer a consultation to determine if you would benefit from an enhanced estate plan.(TM)

Please feel free to call 610-933-8069.

By:  David M. Frees III, JD

dfrees@utbf.com

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Picking an executor is a critical part of any sophisticated or even simple and effective estate plan. Having the wrong executor or someone that does not fully understand your wishes can wreak havoc on your estate’s administration and more importantly on the execution of your wishes. In fact, other than the decision to create and execute an estate plan; executor selection may be one of the most important estate planning decisions you will make. Consider the Pennsylvania case below.

In a recent 2011 Pennsylvania case a co-executor removed decedent’s safe and financial records two days before the death and failed to return or disclose this to the beneficiaries or list the items on the inheritance tax return. The Orphans Court removed and surcharged the co- executor for attorney fees and costs of the estate. Jonik Est. (O.C. Div. Phila.), 1 Fiduc. Rep. 3d 296.

Would your executor do this to you?

Do you have the right executor?

How do you pick the right person or institution to do this job?

Click here to read more about how to select the right executor for your estate plan.

Being an executor is a tough job. The executor must find your legal and financial documents, gather your assets, pay off all your debts, keep the beneficiaries informed, make financial decisions, and implement your wishes as if you were there.

Many times we see executors who are overwhelmed by the amount of work required by law to be an executor in Pennsylvania.  For that reason, it is important to pick someone who can handle it and even more importantly can get the job done the way you would want your estate administered.

Furthermore we often see even dedicated executors make the same simple but dangerous mistakes. To educate yourself and or your executors click below to get a free copy of our resource for executors.

The Ten Most Common Mistakes Executors Make… and how to avoid them

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