FLPs and valuation discounts.

• Author: Lindbloom, John W.
• Position: Family limited partnerships

The family limited partnership (FLP) has quickly become a staple in the estate planner's "toolbox." Over the past several years, FLP formation to achieve estate tax savings has grown dramatically. The primary purpose for creating FLPs is to hold certain assets and use the partnership to transfer ownership in them by transferring limited partnership interests to other family members. The result is that ownership in family assets is transferred at a reduced gift-tax cost without inclusion in the donor's estate. There are other benefits to FLP use, including retaining control of certain family assets by senior family members and protecting certain family assets from creditors.

Gift and Estate Taxes

The IRS has consistently resisted FLP use as a vehicle to reduce gift and estate taxes. The typical scenario involves creating an FLP to which older family member(s) contribute assets in exchange for a general partner interest and a significant percentage of limited partnership interests. The younger generation contributes assets or cash for a smaller percentage of the limited partnership interests. The elder generation typically retains control over the assets through its general partner interest and proceeds to gift its limited partnership interests to the younger generation, using substantial valuation discounts for gifts of minority interests. The Service prevails in limiting valuation discounts when such discounts are overly aggressive or the partnership agreement places excessive restrictions on the limited partners or provides too much discretion to the general partner.

FSA 9919009

The IRs issued Field Service Advice (FSA) 9919009, in which FLP interests were not permitted a discount. In the FSA, the partnership agreement provided that the entity would continue for 50 years or until the general partner and more than 50% of the limited partner interests agreed to termination. No partners could withdraw or reduce their capital contributions until termination. The partnership agreement could be amended only on the same basis as termination. The FLP was created under...