Many taxpayers have formed family limited partnerships to control family assets. In these structures, a transferor (such as a wealthy parent) would transfer assets to a limited partnership or LLC. Members of the family’s younger generations often are partners in the FLP in addition to the senior family members. The ownership may remain static, or the senior family members may transfer FLP partner interests over time to a trust for the benefit of, or outright to, the younger generation. The values, for estate tax purposes, of the interests owned by the senior generation members on their death, or of interests transferred during their lifetime for gift tax purposes, may be accorded certain valuation discounts, to reflect the fact that the partnership or LLC interests were not freely transferable, and due to lack of control. While there are many intricate details relating to FLPs, they have been an accepted estate planning strategy for many years, when tax rules and governance of the entities are properly respected by the family.
The IRS has now restated its intention to release proposed tax regulations in the next month or two that would impact the allowable valuation discount for entities holding portfolio-type assets (stocks, bonds, passive real estate, art, etc.) when family members are the owners of such entities, or when intra-family transfers are made. While proposed regulations don’t carry the weight of law until they are finalized, they do indicate the position of Treasury. There is no assurance that the regulations would be prospective only. If you are interested in discussing the use of family limited partnerships, please contact the author of this article, Larry Bober, at (847) 964 5335, or on firstname.lastname@example.org.
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