Paul L. Caron
Dean





Thursday, February 4, 2021

Family Limited Partnerships: Are They Still A Viable Weapon In The Estate Planner’s Arsenal?

Matthew Van Leer-Greenberg (Van Leer & Greenberg, New York), Family Limited Partnerships: Are They Still a Viable Weapon in the Estate Planner’s Arsenal?, 25 Roger Williams U. L. Rev. 37 (2020):

Using an FLP would be analogous to using Micky Thompson Drag-Slick tires: they are excellent for trying to get your 1971 Plymouth ‘Cuda down the quarter mile at Raceway Park in Englishtown, New Jersey, but you would not want to use them for commuting to and from work on a daily basis. In layman’s terms, an FLP has its specific purpose. If a savvy estate planner wanted to implement an FLP, she or he would need to have the right factors in place in order to properly propose such a tool.

First, the estate planner would need to make sure that the FLP is created a significant amount of time before the death of the decedent (preventing what looks like a death bed transfer), such as when the decedent is alive and not suffering from any medical or mental maladies that would lead one to think that death is impending.

Next, she or he must ensure that when the partnership is created, it has a formulated, bona fide purpose, such as being used to transfer a business from one family member to another. Simply transferring assets for the purpose of defeating estate taxes will likely generate suspicion and an audit from the IRS.

Third, she or he should ensure that when funding the FLP, a business entity is put into the FLP with any and all other assets that the client would want to transfer from the first to the second generation. Placing a running business in the FLP, and not just passive assets that are being consolidated for “managerial investment purposes,” will provide validation to the “business purpose” reasoning.

As for drafting the FLP agreement, a savvy estate planner should ensure that the decedent (who is receiving the share of the business assets) is not provided too much power to determine who provides beneficial enjoyment of the partnership interest, for this will surely create inclusion under section 2036(a)(2).

Finally, when the assets are transferred to the partnership, the estate planner must ensure that if the transferor is still using the property that was transferred, the decedent is following all accepted business formalities required to show that this is now an arm’s length business relationship (such as paying to use a car or providing rent to live in a transferred house).

An FLP is a useful estate planning mechanism that allows for a person to transfer his or her assets from one generation to the next while providing substantial benefits to both the transferor and the transferee. Even though cases such as Strangi and the current state of the estate planning field have made the FLP a less relevant estate planning tool, it still provides benefits to clients in certain situations where a business is a central part of the family income and wealth generation.

https://taxprof.typepad.com/taxprof_blog/2021/02/family-limited-partnerships-are-they-still-a-viable-weapon-in-the-estate-planners-arsenal.html

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