Family Limited Partnership: Overview
Over the past decade, the Family Limited Partnership (FLP) has risen from obscurity as a little known tax loophole, into a prominent strategy for asset protection and estate planning. The asset protection and estate planning benefits of the FLP have been written about extensively in every national publication from the Wall Street Journal to Forbes Magazine. A Google search of Family Limited Partnerships will return thousands of hits with many law firms and accounting firms extolling its virtues.
In this chapter, we will look at the FLP and discuss realistically and critically what this technique can and cannot accomplish. Recent law changes and cases highlight the advantages and opportunities of the FLP, and we will also point out some of the common pitfalls and traps that should help you to proceed with a clear understanding of planning strategies available with the FLP.
In particular, a crucial point to proper planning with a Family Limited partnership, is that the remedy of a creditor is generally not limited to a charging order. The trend in legislation and case law, is to allow a creditor to foreclose on a limited partnership interest (or an LLC interest). The foreclosure remedy is a key consideration in asset protection planing with a Family Limited Partnership.
The Family Limited Partnership is also a popular estate planning strategy as we discuss in this chapter. For a review of the position taken by the IRS and the courts on the availability of a discount for estate tax purposes and the inclusion of transferred Family Limited Partnership interests in the taxable estate, see
http://www.irs.gov/pub/irsutl/asg_penalties_family_limited_pships_finalredacted10_20_06.pdf
There are numerous cases where the Court has applied the provisions of § 2036(a) to the transfer: Estate of Schauerhamer, T.C. Memo. 1997-242; Estate of Reichardt, 114 T.C. 144 (2000); Estate of Harper, T.C. Memo. 2002-121; Estate of Abraham, T.C. Memo. 2004-39, aff’d 408 F.3d 26 (1st Cir. 2005); Estate of Hillgren, 87 T.C.M. 1008 (2004); Estate of Thompson, T.C. Memo. 2002-246, aff’d Turner v. Commissioner, 382 F.3rd 367 (3rd Cir. 2004); Estate of Strangi v. Commissioner, 115 T.C. 478 (2002), aff’d in part rev’d in part Gulig v. Commissioner, 293 F.3d 279 (5th Cir. 2002), rehearing denied Gulig v. Commissioner, 48 Fed. Appx. 108 (2002), on remand at, judgment entered Estate of Strangi v. Commissioner, T.C. Memo. 2003-145, aff’d Strangi v. Commissioner, 417 F.3d 468 (5th Cir. 2005), review or rehearing granted 429 F.3d 1154 (5th Cir. 2005); Estate of Kimbell, 371 F.3d 257 (5th Cir. .2004); Estate of Bongard, 124 T.C. No. 8 (2005); Estate of Bigelow, T.C. Memo. 2005-65; the companion Korby cases, T. C. Memo. 2005-102 and 103; and Estate of Schutt, T.C. Memo. 2005-126.
