Troubleshooting checklist for family limited partnerships

The online accountant
Tony Novak, MBA, MT, Certified Public Accountant
(610) 572-1724   onlineadviser@live.com  @tonynovak

    Troubleshooting checklist for family limited partnerships

by Tony Novak, CPA, MBA, MT
, revised 11/28/2011

Family limited partnerships (FLP) were a popular way for family businesses to protect assets and reduce estate taxes over the past two decades. They were especially popular for holding stock and real estate that was intended to pass from parents to children. In recent years the IRS and Tax Court took a tougher stance on these tax shelters. Most financial advisers have modified the format of the FLPs they recommend now to comply with the more conservative legal positions. Many FLPs set up years ago and not recently updated could be held invalid by the IRS, making them useless for reducing taxes after the death of a parent.

Your FLP could be in trouble if any of the following apply:

• The FLP was set up while the parent was terminally ill
• The FLP held ownership of the parent’s principal home
• The FLP owns substantially all of the assets of the parent
• The parent controls the management of assets
• The FLP is funded exclusively with the parent’s assets and not the other partner’s (children’s) assets
• The FLP is used as a checkbook to pay expenses like rent or health care
• There are no regular income distributions paid systematically to all partners
• The FLP was set up years ago and not updated by an attorney within the past few years
• The main purpose of the FLP was to avoid taxes rather than run a legitimate family business venture

While none of these factors is by itself a fatal blow to the tax status of an FLP, the occurrence of any of these is good reason to schedule an overall financial review. The FLP might either be updated or exchanged for a more secure legal format like a family limited liability company.

Status: available for reprint

This article is available for republication in its entirety without charge after obtaining the express written permission of the author.

Pleasee-mail a request to the author that includes the name of the requestor (individual and corporate) and the intended destination of publication.

 
Have an unresolved  tax question or financial concern?
I offer a simple and easy $100 flat fee initial consult and second opinion service that includes a written follow-up summary and recommendations. Telephone or web/video appointments are available daily – usually on short notice – for this high value service. Use the message screen at the bottom right of this page to reach me quickly.

This Web site is independently owned and operated by Tony Novak operating under the trademarks “Freedom Benefits”, “OnlineAdviser” and “OnlineNavigator”. Opinions expressed are the sole responsibility of the author and do not represent the opinion of any other person, company or entity mentioned. Tony Novak is not a representative, agent, broker, producer or navigator for any securities broker dealer firm, federal or state health insurance marketplace or qualified health plan carrier. Novak is compensated as an accountant, adviser, writer, consultant, marketer, reviewer, endorser, producer, lead generator or referrer to the commercial companies listed on this site or non-governmental commercial insurance exchanges. Information is from sources believed to be reliable but cannot be guaranteed. Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues or a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Novak would be pleased to perform the requisite research and provide you with a detailed, written analysis at your request. Such an engagement would be subject to an engagement letter that would define the scope and limits of the desired consultation services.

Tony Novak  |  P.O. Box 333, Newport NJ 08345  |  141 Jones Street, Bala Cynwyd PA 19004