Attorney Matthew Van Leer-Greenberg evaluates the continued relevance of family limited partnerships (“FLPs”) in estate planning. FLPs have been excellent tools for asset protection, continuity of control, succession planning, and attainment of substantial tax benefits. With other options such as limited liablity companies and corporations offering some of the benefits of FLPs, Leer-Greenberg explores whether recent cases have diluted key benefits of FLPs—namely, valuation discounts and exclusion from the gross estate for estate tax purposes.
In Family Limited Parnerships: Are They Still a Viable Weapon in the Estate Planner’s Arsenal?, Leer-Greenberg begins by discussing Internal Revenue Code (“IRC”) § 2036, a key provision for tax planning benefits of FLPs that generally requires inclusion of transfers with a retained life estate in the decedent’s gross estate. FLPs can be structured in ways that remove the transfer from the transferor’s gross estate at death while discounting the value of the lifetime transfer for purposes of the gift tax during life. To achieve the intended outcome from a transfer to a FLP, the transferor must give up control and make a bona fide gift or sale of the interest.
Next, Leer-Greenberg discusses various benefits of FLPs. Continuity of control provides the benefit of continued access and control by the transferor post transfer. Further he discusses how FLPs are great instruments for consolidation and asset protection while reducing tax liability if set up properly. As such, FLPs are great estate planning tools for creating and transferring inter-generational wealth. These benefits are less effectively obtained through traditional gifts or sales; therefore, FLPs are preferred methods for wealth and succession planning.
Because FLPs are subject to abuse, the Internal Revenue Service Commissioner (“Commissioner”) has challenged the legitimacy of the transfers and the valuation discounts. Leer-Greenberg discusses the impact of Strangi v Commissioner on FLP jurisprudence. Strangi is known for focusing on implied agreements and the lack of legitimate and significant non-tax reasons for establishing the FLPs as grounds for rejecting valuation discounts. Post Strangi, he explains how estate planners have used Strangi for guidance on how to structure FLPs to avoid estate tax inclusion.
Leer-Greenberg also discusses Estate of Powell v Commissioner, where the Tax Court addressed the timing of transfers and assignment of partnership interests. The court disregarded the FLP and included the assets in the gross estate under § 2036 because the transferor had a retained interest. Specifically, the transferor had control, in conjunction with another, to make distribution decisions on the date of death. Both cases indicate estate planners must exercise caution when drafting FLPs.
These cases, and others, lead to Leer-Greenberg’s query as to whether FLPs are still viable as estate planning tools. Given the increased exemption amount, along with with the unused spousal credit, he questions whether it is widely beneficial to engage in tax planning, since most people will not be subjected to an estate tax. He concludes that state estate tax consequences still loom, and therefore, the tax planning aspect of FLP planning remains relevant to wealthy taxpayers.
Leer-Greenberg then gives clear recommendations for estate planners to maximize benefits of FLPs in the estate plan. He indicates they should be mindful to avoid deathbed transfers, to clearly indicate legitimate non-tax reasons for establishing the FLP, and to avoid transferring too many assets so the transfor will not require distributions from the FLP. Finally, he recommends that FLPs should follow business formalities to demonstrate a legitimate business purpose.
This article is valuable because it addresses the question of viability and effectiveness of FLPs in estate planning. By analyzing the trajectory of FLP cases, he identifies trends that provide a useful roadmap. He also notes some of the trade-offs and incentives underlying the creation of FLPs. Clients, for instance, want tax and wealth transfer benefits but they also want to maintain control for as long as possible. Estate planners may also savor the challenge of finding new ways to allow clients to maintain their desired control while retaining tax benefits. Such planning may require finding new strategies to avoid the problems identified in Strangi, Powell, and other cases. This article reminds us that, as experts, the real problem is managing expectations from clients and self. FLP jurisprudence is still developing but should not invite us to keep following the road less traveled. Strangi, Powell, and other cases have already demonstrated where the landmines are, so just follow the roadmap.
Furthermore, even with substantial federal exemptions, FLP tax planning is of greater relevance than might appear, because the current federal exemptions expire in a few years. We cannot predict what will happen to the exemptions thereafter. Hence, estate planners should continue to avoid problems previously identified because a clear tax motive will reemerge if the federal exemption levels decrease. In the end, estate planners can and should keep FLPs in the arsenal of estate planning tools because FLPs are not the source of the problem—they merely represent new ways to solve the riddle of how to obtain tax benefits without giving up control.
