Estate of Thompson: Respecting the Formalities of the Family Limited Partnership

The article discusses the use of family limited partnerships (FLPs) in estate planning. It gives an example of a case where the IRS scrutinized the use of FLPs for tax purposes. In this case, a man named Theodore Thompson set up two FLPs with his children to reduce estate tax. However, the IRS determined that he still had control over the property in the FLPs and included it in his estate for tax purposes. The article also provides a checklist for proper maintenance of FLPs. Mr. Thompson and Mr. Turner each set up a family limited partnership (FLP). Mr. Thompson put in $1,118,500 worth of marketable securities and got notes from Robert’s family. Robert put in mutual funds worth $372,000 and a ranch worth $460,000. Mr. Turner put in $1,000 in cash and property in Vermont worth $49,000. The Turner Corporation also gave Mr. Thompson a note for its interest in the Turner FLP. Mr. Thompson passed away, and his estate had to pay federal estate taxes. The IRS said his assets were worth more than what was reported on his tax return, so they sent a notice saying the estate owed more money. The estate argued that the value of Mr. Thompson’s interests in the FLPs should be determined by reducing his share of the FLP assets by 40 percent. The IRS said that all of Mr. Thompson’s assets in the FLPs should be included in his estate when he died. They said this because they didn’t think the FLPs were real and also because they thought Mr. Thompson still had control over the assets even though he transferred them to the FLPs. The Tax Court agreed with the IRS and said that Mr. Thompson still got the benefit from the assets even though they were in the FLPs. Mr. and Mrs. Thompson set up Family Limited Partnerships (FLPs) with the help of financial advisors to save on taxes. They made distributions from the FLPs to Mr. Thompson so he could continue giving gifts to family members. However, the IRS challenged the validity of the FLPs because Mr. Thompson still had control over the assets even though they were technically transferred to the FLPs. The court agreed with the IRS and said that the FLPs were not run like a real business, and the family used them to give loans and gifts to each other. This case shows the importance of setting up and running an FLP correctly to avoid legal issues. It’s important for clients to treat their corporation and FLP as real businesses, not personal piggy banks. You can’t use the company’s money to pay for your personal stuff. Distributions from the FLP should be made according to the partnership agreement, and everyone should get their fair share based on their partnership percentages. In a real-life example, Mr. Thompson got in trouble for not following these rules and distributing FLP income unfairly. The partners in the Family Limited Partnership (FLP) should contribute assets according to their ownership percentages, and their capital accounts should be adjusted accordingly. The corporation, as the general partner of the FLP, should hold annual meetings and keep minutes to discuss business and appoint officers. The FLP should also maintain records and establish capital accounts. The limited partners generally don’t have a say in the daily management of the FLP, but they may have a say in important decisions like adding or replacing partners or amending the partnership agreement. The general partner of the FLP must keep records of all FLP transactions and prepare an annual written account of the FLP’s activities. Each partner should have a separate capital account that reflects their contributions and changes. It’s important for clients to keep some of their assets outside of the FLP for daily living expenses and gift giving to avoid legal issues. The FLP agreement should be treated like a real business, with transactions documented in writing and followed carefully. The FLP and corporation need to file tax returns every year. Income and losses from the FLP and corporation are reported on the individual partners’ and shareholders’ tax returns. It’s important to work with an accountant or tax advisor to prepare these returns. When forming a Family Limited Partnership (FLP) or corporation, it’s important to keep up with the paperwork and fees required by the state. If you don’t, the state could dissolve the entities. It’s the client’s responsibility to maintain the FLP properly and follow all the rules. To help with this, the authors have created a checklist for estate planners and their clients to use. Following these guidelines will help avoid potential problems with the FLP. This article discusses a court case about a man named Mr. Thompson and his family limited partnerships (FLPs). The court focused on whether the assets transferred to the FLPs should be included in Mr. Thompson’s estate for tax purposes. The article also mentions that Mr. Thompson gifted limited partnership units in the FLPs in the mid-1990s, and received distributions from the FLPs for gift giving. It also discusses how the FLPs were used for Mr. Thompson’s lending and explains the potential benefits of using FLPs for estate planning. 1) Keep FLP money separate from personal money.
2) The president endorses FLP transactions and the president should endorse corporate transactions.
3) Keep a separate account for each FLP partner and get help from an accountant for it.
4) Have annual meetings for the corporation and keep records of what was discussed.
5) Keep accurate records of FLP transactions and prepare a yearly report of all transactions.
6) Get an accountant to do the tax returns for the FLP and the corporation.
7) Make sure FLP distributions are done according to the partners’ percentages.
8) Pay personal expenses with personal, not FLP, money.
9) Make sure the FLP and corporation stay active in their state by paying any fees and taxes. David Pratt is a lawyer who helps people with their estate planning. He has lots of experience and is very knowledgeable in tax and wills, trusts, and estates. Jennifer E. Zakin, another lawyer at the firm, also knows a lot about taxes and estate planning. This article was written for the Tax Section by some important people.

Source: https://www.floridabar.org/the-florida-bar-journal/estate-of-thompson-respecting-the-formalities-of-the-family-limited-partnership/