A family limited partnership (FLP) can reduce estate and gift taxes if there is a valid business purpose for creating such a partnership. Such an FLP recently won a victory over the IRS in Tax Court, which cited these reasons:
- Convincing reason for existence. The stated purpose for creating the FLP was to prevent family discord. The family’s younger generation had a history of quarreling about the assets at issue.
- Personal financial solvency. The parents kept enough assets out of the FLP to enable them to maintain their lifestyle without tapping partnership assets.
- Multiple contributions. All of the partners, including the children, contributed to the FLP upon formation.
- Genuine negotiations. Parents and children were represented by their own attorneys when the partnership agreements were drawn up.
- Significant life expectancy. The decedent in this case was in relatively good health when planning for the FLP began. This was not a deathbed deal, done solely to avoid estate tax.
The above reasons demonstrated that the FLP was not created for tax avoidance alone so the Tax Court held that such an FLP will be recognized, for gift and estate tax purposes.
