As always in the tax field, excessive aggressiveness can be deadly. For example, the assets of a deceased person in the Technical Advice Memorandum 9719006 (originally unpublished by the IRS) consisted of rental property and negotiable securities held in a revocable trust and a conjugal trust with which his two children remain. Two days before the death of the deceased, the deceased formed an FLP through his two children on behalf of the deceased, and the trusts paid property valued at $2,259,143 to the partnership. The deceased was terminally ill at that time and the life support had been removed. When the deceased died two days later, the estate claimed that the interest in the deceased`s partnership was worth $1,177,013, for a total discount of 48%. The IRS shut down the entire system for two reasons. First, the IRS concluded that the agreement should be treated as a single testamentary transaction and that the interests of the partnership had not been taken into account. Given the facts, it is hard to deny. Second, the IRS concluded that the agreement violated Article 2703(a)(2). Specifically, the IRS concluded that the agreement had no commercial purpose. The TAM recalls that substance takes precedence over form and that family transactions are subject to special scrutiny, the presumption, as set out in the TAM, being that such transactions do not comply with arm`s length conditions. The sole purpose of the agreement, according to the IRS, was to reduce the value of the partnership assets passed on by the deceased`s estate to the children who would have received them anyway.
While this age limit may seem surprising, until recently there was no limit, so a PLL could be used to reduce taxable income by passing it on to young children. In any case, it is still possible to pass on the profits to family members, thereby reducing the taxable income of the FLP. The latter are sponsors (LPs) who have an economic interest in the partnership, but who are unable to control, direct or otherwise influence the operation of the FLP. In fact, LPs generally do not have the opportunity to sell their stake in the FLP unless it is an immediate family member. These are usually the children and grandchildren of parents who own a business or trusts established for the benefit of those descendants. They are entitled to their proportionate share of the partnership`s income and, as the name suggests, are liable only to the extent of their investment in the partnership. This means that anyone, even without a PLL, can donate personal or family assets of up to $15,000 per person to any number of people – without that amount being subject to an onerous tax on donations. Ownership of the interests of a limited partnership is not as important as the general interests of the partnership. Under Connecticut law, section 34-15 of the SGC, a limited partner to maintain its limited liability, is not permitted to participate in the control of the partnership, and its ability to influence material decisions is also limited.
For these reasons, parents are not „threatened“ if they have their children as sponsors. Well structured, a family limited partnership (FPF) can be an invaluable tool in your estate planning process. While an FLP can offer many advantages, it also has a number of disadvantages. That`s why it`s important that you do all your research before you take the plunge and decide to implement a family limited partnership as part of your estate planning. However, in a PLL, this may not be the case, and children may face significant capital gains liabilities. This varies depending on the type of property to be transferred and what happened to it. It`s always best to discuss potential capital gains issues with a lawyer – and it`s always important to remember that the assets of an FLP do not have the same basis of increased value as the assets left to heirs. Don`t assume that just because your corporate assets aren`t exclusively marketable securities doesn`t mean you`ll avoid your FLP being called an investment partnership. There are a number of situations that can lead to PLFs being classified as investment partnerships, so it`s important to review the structure of your PLF with qualified legal counsel. An FLP is a great way to generate capital for an investment while passing on your estate to your family members with limited taxes. However, as we mentioned above, it contains some potential liabilities. Ownership of the partnership`s interests is structured in such a way that the parent company always controls important partnership decisions.
Such decisions would include at least investment and the power to allocate the company`s assets. If the parent retains control (control means that the parent has the majority of the voting rights in the interests of the partnership), the parent feels psychologically that „nothing has really changed“ and isolates the assets of the corporation from potentially negligent decisions that younger family members might make. The LLP serves to protect all partners from legal liability, but there are also restrictions on the number of words they have in the company – which is why they are also called „sponsors“. On the other hand, a single general partner is responsible for the day-to-day management of the company and also ensures the decision-making of the managers. While many small businesses are limited liability companies (LLCs), some founders may not need LLC protection. See if you belong. While most people call their living trust, their full name, and that of their spouse, you don`t have to. Find out what factors to consider when naming your trust – and whether or not you can change the name once your trust is funded. In a typical FLP, parents transfer assets to the partnership in exchange for general shares and limited partnerships. They keep their class actions and may also have limited partnership shares.
The remaining shares of the limited partnership are divided among their children and grandchildren, who then become limited partners. If you formed an FLP to form a family investment company, the assets you donate or bequeath may be subject to capital gains tax. The family business doesn`t have to be a business in the traditional sense – assets such as real estate or investments can also be in an FLP, just like the family farm, ranch or real estate property. The nature of the FLP allows you to transfer the value of assets to other members, thereby reducing the size of the estate for some members. Every year, when the mortgage is repaid and dividends are distributed to the partners, the family gets richer. Without the pooling of their money by a family limited partnership, this investment would not have been possible. Sponsors may receive distributions from the FLP and benefit from certain tax benefits. Asset protection is another attractive feature of FLP. The company`s assets are protected from the creditors of the limited partners. Interests in a PLF can easily be divided among family members, each of whom may have different amounts. The FLP makes it possible to transfer ownership of a business to the younger generation, while allowing the older generation to continue to carry out operations, supervise and take care of young owners.
A typical family limited partnership has two types of partners: general and limited. If one or more family members are appointed general partners, each person is responsible for the day-to-day management of the limited partnership. This includes hiring and firing decisions, as well as cash deposits and withdrawals. There are situations where the formation of a family limited partnership is not the most strategic option. The disadvantages of an FLP include: FLPs are true business agreements and must prove the attributes of a business partnership or face classified by the IRS as a gift to children. Regular meetings must be held, formal minutes must be made, and appropriate compensation must be paid to the general partner for his or her services to the corporation in accordance with the Internal Revenue Code. Although the FLP is most often used as an estate planning vehicle, it is important to note that it must be managed as a limited partnership to maintain its validity as an FLP. The most common way to set up a PLF is first to establish a partnership with limited partnership interests. The general partner then gives the limited partnership`s share to eligible children or other family members. Whoever holds the general title retains control of the corporation or assets, but the limited partnership allows children or other eligible family members to participate in the property. Indeed, FLP`s assets are measured at fair value for tax purposes in certain donation contexts. An interest in FLP`s assets offers very restrictive conditions, especially in relation to participation in the general partnership.
For this reason, enterprising families often choose to give their heirs a large portion of their estate using an FLP during their lifetime. This allows them to completely avoid state inheritance and estate taxes and extend their available exemption from federal estate tax by transferring real estate at a fair market value discount. .