Since we began our practice in 1983 we have created hundreds of Family Limited Partnerships (FLPs) and Family Limited Liability Companies (FLLCs) in order to centralize management of assets in our clients’ estate and offer creditor protection. In some cases these entities have allowed our clients to realize some estate tax savings because of minority interest and lack of marketability discounts.
FLPs and FLLCs claiming these discounts have attracted much IRS attention over the years. There have been many cases where they have challenged the reduction of estate tax due to discounting the values of these entities. Unfortunately, IRS challenges have been successful in many instances.
Taxpayers have lost cases where Mom and Dad did not maintain the integrity of the entity, choosing instead to treat it as their personal piggy bank. They have lost if gifts of interests to children were incorrectly made. In those cases the value of the gifted assets were brought back into the taxable estate of the parents who created the plan.
In addition, one overlooked consideration when deciding whether to use a FLP or FLLC turns on what kind of business interests are held in the entity. FLLCs may offer more certainty of the deductibility of business losses than the FLP.
Here’s the point. If you have an FLP or an FLLC, it is extremely important to keep these plans up to date and be sure they are operated correctly on a day to day basis. Virtually every FLP or LLC created prior to 2008 needs to be reviewed to be sure they are correctly structured to achieve your objectives.