By Cynthia L. Umphrey
For years, Family Limited Partnerships (FLPs) have been one of the key tools lawyers, accountants and other financial advisers recommend to wealthy clients for transferring large amounts of money and other property in a gift and estate tax advantaged manner to their heirs. Limited Liability Companies are also often used.
However, since last year when a U.S. Tax Court judge ruled against a FLP set up by Texas businessman Albert Stangi, the strategy has been under a cloud. The judge sided with the Internal Revenue Service (IRS) in ruling that Mr. Stangi exercised too much control over his family partnership.
The decision meant a tax bill of more than $1 million for his heirs and jolted tax experts around the nation. It has been appealed.
In late May, there was a collective sigh of relief when the same appeals court threw out a ruling against a different family partnership in Texas, dismissing the IRS’ objections. The new decision involved the estate of Ruth Kimbell.
At the time Mrs. Kimbell died there was $2.4 million in the limited partnership, which had been created just a few months earlier. It included working interests in oil and gas properties. The appeals court noted that Mrs. Kimbell retained sufficient assets outside the partnership for her own support and “there were no commingling” of partnership assets with her personal assets.
The case has been sent back to the lower court. The IRS has declined to comment, but tax experts predict that the IRS will continue to fight FLPs around the nation. However, we agree with many sophisticated estate planners who believe that the decision in the Kimbell appeal confirms that a carefully drawn FLP agreement is still a very important tool in the arsenal of estate planning techniques.
Based on recent court rulings, we suggest following a few simple rules to minimize problems with your FLP:
- Do not put all of your assets into the partnership;
- Do not try to exercise too much control over the partnership;
- Do not dip into the partnership to pay monthly personal bills; and
- Do not set up a partnership that looks like it is designed solely to dodge taxes.
Of course, these are just a few basic suggestions and many other strategies can and should be used to protect the tax advantages of your FLP.
For further information regarding these matters, please contact Ms. Umphrey at 248.619.2591 or click here to send an email.
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