Many of the strategies used to reduce or eliminate estate taxes involve a technique known as a Family Limited Partnership. In the most popular version family wealth is transferred into a FLP and gifts of partnership interests are made to children or other family members. Because of the rules currently in effect, the value of these gifted partnership interests can be discounted by thirty to fifty percent, saving potentially millions of dollars in estate taxes.
The IRS has battled taxpayers using this strategy in court for many years without much success. Now, the IRS is proposing new regulations to minimize the tax advantages of the FLP. Individuals, who have substantial estates which may be subject to tax, should take advantage of current tax laws to avoid the forthcoming restrictions.
Specifically under attack are those who attempt to discount the value of FLP’s funded with liquid assets or publicly traded securities. See the New York Times Article “Navigating Tougher IRS Rules for Family Partnerships”; See also “Avoid Estate Taxes with Family Limited Partnership”.
Although the scope of the new proposals are not yet clear, the aim of the IRS is to eliminate the discount for FLP’s funded with cash or marketable securities which are easy assets to value. According to the IRS, simply by changing the form in which assets are held should not create the opportunity for substantial valuation discount and reduced taxes. Even if the partnership interests which are gifted cannot be sold for the value of the underlying assets because the benefit of the partnership assets may not be realized for many years, if ever, the traditional discount for lack of management and marketability may be ignored.