The planning and formation stage is just part of the process of having a successfully implemented family limited partnership (FLP). Failure to attend to operational details and other factors or mistakes can invalidate the tax advantages of this vehicle. Here are some pitfalls to avoid:
The IRS takes a dim view on death bed or terminally ill transfers. There are many court cases that have invalidated the tax benefits associated with FLPs where decedents implemented this plan on or near their death bed. Planning for and the implementation of FLP should begin well in advance of any medical problems.
The creator’s contribution of substantially all of his or her assets to the FLP, including homes and other personal assets, without retaining sufficient funds for everyday expenses has resulted in many tax cases being decided against taxpayers. This factor has also been coupled with the creator (decedent) using the assets of the FLP to pay personal expenses and not following the terms of the FLP. Merely forming an FLP is not enough; the creator of the FLP must not unilaterally take monies from the FLP whenever he or she decides to do so.
The FLP should not make disproportionate distributions to the transferor to pay for living expenses. Upon the death of the creator of the FLP, the FLP should not pay for estate expenses or estate taxes. Distributions from the FLP need to be made in accordance with the ownership percentages of the partners in the FLP. Selective or disproportionate distributions to selected partners can doom a FLP.
The parties fail to follow partnership formalities. Formally transferring legal title to all property to the FLP needs to be done. For example, if real estate is involved it must be transferred by deed to the FLP and formally recorded with the recorder of deeds in the county where the real estate is located. Failing to keep proper books and records can jeopardize the tax advantages sought by use of the FLP. Failure to set up a separate bank account for the FLP is problematic. The payment of FLP obligations personally and not by the FLP should be avoided and will put the parties in a bad position if the IRS reviews and audits the FLP.
Where there is little or no change in investment and business strategies after the transfer of assets to FLP, the IRS has challenged the validity of the tax benefits associated with the FLP.
The parties commingling of partnership and personal assets has been a significant factor in cases in this area. Once again assets in the FLP should not be used for the personal expenses of the creator of the FLP.
Where younger family members are not actively involved in FLP business decisions and kept in the dark about business operations the tax objectives of setting up the FLP may be jeopardized. Additionally, where the FLP was formed without the other family members having advice from independent counsel and/or failed to retain a valuation expert to make sure their interest was correctly valued, the IRS has challenged the tax benefits associated with the FLP.
The benefits of implementing a family limited partnership can be extremely significant. However, the FLP must be formed and operated in a business like and arm-length manner to insure the estate, gift and income tax benefits. For a discussion of these benefits please see the companion article entitled Family Limited Partnerships.
Hiring Steven was quite possibly the best decision of my life! Steven took the time to hear every single one of my concerns and address them in an extremely clear, concise and thorough manner. He guided me through the notoriously complicated and stressful process of probate with the utmost of compassion and dedication. Thank you Steven!
I highly recommend Steven J. Fromm for all your estate and tax planning needs. He has the most complete and thorough knowledge of current as well as pending federal, state, and local tax codes of any professional that I have ever been involved with. His ability to totally sort out your current financial condition and relate it to a plan to minimize your tax liability and allow you to sleep at night is without equal. He is professional, timely, creative, and an advocate for your needs, whether its personal or business. You can be assured that you will be well taken care of, with cutting edge/ sound financial and tax advice by Steven J. Fromm.
I have always found Steve to be very responsive, accurate and creative in legal matters presented to him. He demonstrates a good business sense. We have collaborated on several highly technical issues over the years. I look forward to our continuing relationship.
Steven has been instrumental in helping my partner and I to create a secure and satisfying estate plan, which meets or exceeds all of our wishes and contains contingencies for everything from medical issues to wealth management and living wills. In this process, Steven has also become a friend. If you need Estate Planning, Tax Advice, a Will or a trust, etc., we highly recommend Steven Fromm, Esquire. He will listen and be sensitive to your unique situation.
Steve is an excellent attorney who has provided help for my family personally for business, tax, and other services for many years. He is extremely knowledgeable and thorough, and is extremely good at explaining legal concepts to me in clear terms understandable to a non-attorney. It is difficult to pick only three attributes above, since Steve’s work meets most if not all of the attributes above.
Steve is an excellent corporate attorney who has a deep understanding of corporate law, taxes and estate planning. He’s been extremely helpful to me in keeping my many companies and business ventures organized, focused and squeaky clean. He’s very strong in estate planning and wealth preservation as well. Finally, his follow through is air tight and utterly dependable.
Steven is a trusted adviser. We depend on him for so many things. He is patient, listens to our needs and makes excellent suggestions. He is extremely talented. We value his advice and have recommended him unhesitatingly to friends and family.
Steve Fromm is a superb lawyer and I highly recommend him! After a terrible experience with a previous lawyer concerning an estate administration, I entered his office feeling very deflated, confused and discouraged. However, I left his office feeling enthusiastic and eager to get down to business. My situation was very unique, I needed his expertise for an array of things and Steve was able to address all of my needs. With a limited timeframe and an extreme amount of obstacles to overcome he worked meticulously, diligently and accomplished extraordinary results. His professionalism is incomparable and I am forever grateful.