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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Family Limited Partnerships, The IRS, and Your Estate Planning
By: David M. Frees III, Esq.

Estate and Trust lawyer David Frees on FLPs

Many affluent families use family limited partnerships as part of their business succession planning, business continuity plans, and as a legitimate part of estate planning.

Limited partnerships allow a person or family own owns real estate, a family business, or even concentrated positions of publicly traded stock companies to accomplish a number of important things. By using a FLP (Family Limited Partnership) the family can divide the ownership of the company or assets from the management. So, a senior generation can continue to operate the business and mentor the next generation while allowing growth in the value of the company to occur in the children’s names.

The interests in FLPs are easy to divide and different family members can own different fractions of the total asset base or business.

The FLP can help to prevent a dissolution of the company upon the death of a senior family member and can provide for continuity of management.

And, when done properly, and when carefully documented, the FLP structure can result in a diminished value of the gift to children or grandchildren.

FLPs can be used in conjunction with both trusts created during your lifetime, or under a will and can also offer some significant asset protection.

The new York Times recently published a great overview of the pros (some of the benefits mentioned above), the cons (IRS scrutiny for one), and what to do to make sure that the FLP works as intended.

Click here to read this great NY TIMES article on Limited Partnerships and the IRS.

Unruh, Turner, Burke and Frees maintain law offices in Phoenixville, Malvern, and West Chester, Pennsylvania.

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