World Class Mergers & Acquisitions  |  For Companies $5 Million to $100 Million in Revenue

Tax Court Rules That A Family Limited Partnership Is Not Included in the Decedent’s Estate

FLP Not Includible

The Tax Court has ruled that the value of a Family Limited Partnership FLP will not be included in the estate of the decedent.  The decedent owned various tracts of wooded property.  Held together as one company, her thoughts were that the properties were more valuable as opposed to being split apart.  As such, she and her attorney formed an LLC and transferred the properties into it.  Subsequent to the formation of the LLC, the decedent transferred all of the LLC shares to their descendants until she owned only 1% of the interest.

The Court found the transaction was bona fide as there was a legitimate non-tax reason for the transfer.  The Court also found and favored the taxpayer because 1) the property was actually transferred, 2) the interests in the LLC were not discounted, 3) distributions were not made, 4) personal funds were not commingled and 5) the decedent was in good health.  This was not an attempt by the decedent to merely change the form of her estate and thus full and adequate consideration was exchanged.  The fair market value of the decedent’s interest was included in her estate, not the assets that she contributed to the LLC.

Editor’s Comment

This is a logical model of what an FLP and transfer should look like in an ideal world.  The decedent fairly plans the transfer for non-tax reasons and removes value from her estate in order to reduce tax liability, and it worked.  No unreasonable discounts were taken, no penalties were applied, the transaction worked as it was intended and designed to work.

Unfortunately, many utilizing FLPs see the FLP as a way to “stick it to the Government” and it rarely works.  Setting up FLPs can work; and does work as long as the FLP is operated in the right manner with the right purpose.

By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors