Article: Using Family Partnerships

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Brian Puckett, JD, CPA/PFS is the managing principal of Brian Puckett Retirement Advisors, a Federally Registered Investment Adviser. The firm provides comprehensive wealth management services to individuals, families, trusts, corporations and non-profits. Web: www.puckettadvisors.com.

Family limited partnerships (FLPs) provide a unique combination of tax savings, control, and flexibility.  A common strategy is to create a limited partnership in which you are the sole general partner, with a 1% interest. Then, you transfer assets into the FLP and receive, in return, a 99% limited partnership interest.  At that point, you can transfer most or all of the limited partnership interests to your children, grandchildren or to trusts for their benefit.

As general partner, you retain the power to manage the assets, determine distributions, and make other important decisions.  This ability to maintain control while removing value from your taxable estate is the main attraction.  The value of the limited partnership interests can be discounted because a limited partner has restricted rights, such as (1) the inability to transfer or sell the interest, (2) the inability to withdraw from the FLP, (3) the inability to force distributions or liquidation, and (4) the inability to participate in management.  These restrictions result in a business value that is significantly less than the value of the underlying assets – and may result in significant valuation discounts.  This allows you to dramatically leverage or accelerate your gifting program.

A word of caution - the IRS has vigorously objected to FLPs and denied the tax benefits in a number of cases, though it has not challenged the underlying theory of the FLP.

Key features that help justify an FLP include:

·        The partnership must have a business purpose other than tax reduction.  Avoid putting personal assets such as your home, furnishings, and personal checking accounts into the FLP.

·        Separate partnership and personal assets.

·        Follow the formalities. Have all the proper FLP paperwork created and maintained.

·        Create the FLP early rather than shortly before death.

·        Ensure the partnership valuation is defensible. The easiest way for the IRS to disrupt the tax benefits of an FLP is to argue that the partnership interests were grossly undervalued when gifts were made.

FLPs can be an effective vehicle for tax savings and other estate planning benefits. However, they are not for everyone.  Because of the IRS’s animosity toward the FLP, a taxpayer should assume that the strategy will be audited.  If that occurs, the audit is likely to be triggered after the death of the FLP general partner.  Accordingly, the owner must create a record that validates the FLP and must be willing to invest the money and the time necessary to execute the strategy correctly.   Competent legal and tax counsel is essential.  Please feel free to contact us with any questions or concerns.

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