Reminder to Properly Maintain Family Limited Partnerships (FLPs)
The U.S. Tax Court in 2011 issued its opinion in Estate of Paul H. Liljestrand v. Commissioner. In that case, the Tax Court determined that assets held by a Family Limited Partnership were included in the estate of a wealthy deceased taxpayer and were subject to estate tax. The basis for this negative decision was that the deceased taxpayer did not properly follow FLP procedures and co-mingled personal and FLP assets.
FLP clients must be aware of the following:
• Open and maintain a separate account for each FLP. Do not put non-FLP assets into the FLP account.
• Do not commingle FLP and personal assets.
• Keep proper FLP books and records.
• Properly “paper” FLP transactions such as loans, sales, distributions, additional capital contributions, etc.
• Do not use FLP assets to pay for personal expenses. Do not treat the FLP as a personal “piggy bank”. Keep a personal checking account and use it to pay personal expenses.
• Keep sufficient assets outside of the FLP to pay for personal and living expenses.
• Make sure distributions from the FLP are proper according to the FLP governing documents (e.g., distributions are pro rata to all parties).
• Maintain proper capital accounts for each partner.
• Issue appropriate IRS Forms K-1 and file IRS Form 1065 and all other applicable tax returns, each year.
• If individuals contributed notes in return for partnership interests, then the requirements of the notes must be met; make regular interest payments.
• Timely renew your FLP with the Secretary of State, annually.
Proper FLP formalities must be observed in order to safeguard the asset protection benefits of FLPs and to avoid negative tax consequences. Please also see our article, The Care and Feeding of Family Limited Partnerships, or contact us for a copy.
Contact us for further FLP assistance.