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September 19, 2019

Family Limited Partnerships and Divorce: Structuring the Department

by Jackson Watson in Estate Planning

Household Limited Partnerships can present unique obstacles in divorce lawsuits relative to the department of property and debt. It is essential to understand the crucial components, their structure and various assessment approaches in order to efficiently represent a customer where a Family Limited Collaboration belongs to divorce procedures.

Developing a Household Limited Collaboration (FLP) yields tax benefits and non-tax benefits.
Valuation discounts can be accomplished in two ways.5 Absence of marketability is one factor

Lack of control is another factor that minimizes the “reasonable market worth” of a Family Limited
Over the years, the Internal Revenue Service has actually made arguments regarding discount rate evaluations as violent, especially when Family Limited Partnerships are established for absolutely nothing more than tax shelters.13 Sometimes the formation of an FLP is encouraged by customer’s desire to relieve the concern of the federal estate tax.

Consequently, courts have actually begun scrutinizing the usage of FLPs as an estate-planning gadget. In order to get the tax advantage, the taxpayer forms an FLP with relative and contributes properties to the FLP. 78 In exchange for this contribution, the taxpayer receives a restricted partnership interest in the FLP. Upon death, the taxpayer’s gross estate consists of the worth of the minimal partnership interest rather of the value of the transferred assets. 79 A non-controlling interest in a family deserves very little bit on the open market; as such, the estate will apply significant valuation discount rates to the taxable worth of the FLP interests, thereby lowering the quantity of tax owed at the taxpayer’s death. 80 The Internal Revenue Service has been attempting to suppress this abuse by consisting of the entire worth of the possessions transferred to the FLP in the decedent’s gross estate under Internal Revenue Code 2036( a). I.R.S. 2036( a) includes all property moved throughout the decedent’s life time in the decedent’s gross estate when the decedent failed to abandon pleasure of or control over the assets subsequent to the transfer.
For example, in Estate of Abraham v. Comm’ r, 14 an agent of estate petitioned for redetermination of estate tax shortage emerging from addition of complete date of death value of three FLPs in estate The high court concluded that the value of moved possessions were includable in the gross estate, given that testator retained use and satisfaction of property throughout her life. 15 The court stated, “a property transferred by a decedent while he was alive can not be left out from his gross estate, unless he definitely, unequivocally, irrevocably, and without possible appointments, parts with all of his title and all of his possession and all of his pleasure of transferred property.”16 Through documentary evidence and testimony at trial, it is clear that, “she continued to delight in the right to support and to upkeep from all the earnings that the FLPs generated.”17

Another example, Estate of Erickson v. Comm’r18, the Estate petitioned for an evaluation of the IRS’s determination of consisting of in her gross estate and the entire value of assets that testatrix moved to a FLP soon before her death. The court concluded that the decedent retained the right to possess or enjoy the properties she moved to the partnerships, so the value of transferred possessions must be included in her gross estate.19 The court said that the “property is consisted of in a decedent’s gross estate if the decedent kept, by express or suggested arrangement, possession, enjoyment, or the right to income.20 A decedent maintains possession or satisfaction of moved property where there is an express or implied understanding to that impact amongst the parties, even if the maintained interest is not legally enforceable.21 Though, “no one factor is determinative … all realities and situations” need to be taken together.22 Here, the realities and situations show, “an implied arrangement existed among the parties that Mrs. Erickson retained the right to possess or take pleasure in the assets she moved to the Partnership.”23 The transaction represents “decedent’s child’s last minute efforts to minimize their mother’s estate tax liability while keeping for decedent that capability to use the assets if she needed them.”24
Also, in Strangi v. Comm’r25, an estate petitioned the Tax Court for a redetermination of the deficiency. The Tax Court found that Strangi had kept an interest in the transferred possessions such that they were correctly consisted of in the taxable estate under I.R.C. 2036(a), and entered an order sustaining the deficiency.26 The estate appealed. The appeals court verified the Tax Court’s choice. I.R.C. 2036 provides an exception for any transfer of property that is a “authentic sale for a sufficient and full consideration in loan or money’s worth”.27 The court said “appropriate consideration will be pleased when assets are transferred into a collaboration in exchange for a proportional interest.”28 Sale is authentic if, as an objective matter, it serves a “considerable organisation [or] other non-tax” purpose.29 Here, Strangi had a suggested understanding with relative that he could personally use partnership assets.30 The “benefits that celebration kept in moved property, after conveying more than 98% of his total possessions to minimal partnership as estate planning device, consisting of periodic payments that he received from partnership prior to his death, continued usage of transferred house, and post-death payment of his numerous financial obligations and expenses, qualified as ‘substantial’ and ‘present’ benefits.”31 Accordingly, the “bona fide sale” exception is not triggered, and the transferred assets are effectively included within the taxable estate.32

On the other hand, non-taxable benefits occur in two circumstances: (1) household service and estate planning goals, and (2) estate associated benefits.33 Some advantages of household organisation and estate planning goals are:
– Ensuring the vigor of the household business after the senior member’s death;

The following example was provided in the law review short article: “if the family member collectively owns apartment structures or other ventures requiring ongoing management, transferring business in to an FLP would be a perfect approach for ensuring cohesive and effective management.”35 As far as estate related benefits are concerned, a Household Limited Partnership protects assets from lenders by “limiting asset transferability.”36 To put it simply, a lender will not be able to gain access to “amount of the properties owned by the [Household Limited Collaboration]”37
1 Lauren Bishow, Death and Taxes: The Household Limited Collaboration and its usage on estate.