If you are a long-time reader of A Potpourri, you are undoubtedly aware that family limited partnerships (“FLPs”), or substantially similar limited liability entities, are frequently used to make gifts from one generation to the next with discounts for lack of marketability and lack of control. This vehicle has been most effective when funded with income-producing real estate or closely-held business interests, both of which have customarily generated discounts in excess of 20%, and sometimes as much as 50%. Marketable securities, because they are almost like cash, have not heretofore generated the same level of discount as either real estate or business interests. In the July 2004 case entitled Senda v. Commissioner, however, the taxpayer was successful in claiming a 40% discount for gifts of marketable securities!
As you are aware, the IRS continues to attack FLPs, but, as we predicted, the IRS has changed the focus of its attacks to the one area where it has been successful: the formalities of creation, funding, and operation of the FLP. In its recent challenges, including Senda, the IRS has focused on, among other things, whether books and records have been properly maintained; whether there are dedicated bank accounts for partnership operations; whether personal transactions have been intertwined with partnership transactions; whether there is proper documentation for partnership transactions; whether the partnership agreement has been strictly followed; and whether gifts of limited partnership interests have been properly made and valued.
FLPs continue to be one of the most powerful vehicles for transferring a part or all of one’s wealth from one generation to the next, estate tax-free. Please do not hesitate to call us if you have any questions about the creation or use of FLPs in your estate plan.