Allocating gain in an FLP.

• Author: Moore, Philip E.
• Position: Family limited partnership

A family limited partnership (FLP) is a mechanism used to achieve significant gift and estate tax savings through the transfer of assets to family members, by taking advantage of rules permitting reduced valuation of the amount transferred. A donor (typically, a wealthy taxpayer) and one other member (such as a spouse) who wish to transfer assets to younger family members, create an FLP under the limited partnership laws of a particular state. After formation, the donor and the other partner transfer assets to the FLP in exchange for general and limited partnership interests. The donor then makes annual gifts of limited partnership interests to family members, maximizing the gift tax exclusion.

The FLP is increasingly popular, for several reasons. The general partner retains control over the FLP, regardless of the limited partner interests given away. In addition, there may be a discount on the underlying assets for

estate tax purposes. This discount is generally due to the limited partners' lack of control over the partnership and the resulting lack of marketability of those limited partnership interests.

Typically, an FLP is funded with a portfolio of marketable securities or real property with a fair market value (FMV) in excess of the donor's basis. In most cases, no gain or loss is recognized on the contribution of appreciated securities to the FLP, under Sec. 721(a). However, the contribution of appreciated securities to a partnership creates built-in gain; conversely, the contribution of depreciated securities creates a built-in loss. The built-in gain or loss is the difference between the contributed asset's FMV at the time of contribution and its tax basis in the hands of the contributing partner. Under Sec. 704(c), when an FLP disposes of contributed property, the contributing partner recognizes the built-in gain. Property is subject to...