Family Limited Partnership
The Tax Court ruled that interests given in an FLP were completed gifts as they satisfied the present interest tests. As trustees of their respective trusts, a decedent and his wife established a family limited partnership for the benefit of the family. Shares in the FLP were granted among the family members with various restrictions in order to not cause adverse tax consequence on the family. The FLP was funded by publicly traded stocks of which some paid dividends.
A question came up as to whether the interests given to family members were, in fact, gift of present interest thus qualifying for the annual exclusion.
The Court applied a three prong test in deciding whether the interests were present interests. Among what the court found was that the FLP expected to generate income. Second, the income would flow to the shareholders, and third, the income was readily ascertainable as the family members could estimate their income from quarter to quarter.
A gift is not a completed gift, unless it is a present interest in a gift. If it is not a present interest, it does not fall under the annual gift exclusion amount, currently $14,000 per year, per person. When executing an estate plan, it is important to be sure the gift is a gift that qualifies under the exclusion amount. The IRS is critical of estate plans that fall into FLP arrangements. Often times, owners of FLPs and promoters alike do not abide by the proper detail of the plan and the overall plan fails when too much power or too many liberties are taken by the donors. Be careful of estate planning in FLP arrangements.
By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors