Last week’s item on the latest “bad facts” family limited partnership (FLP) case, Bigelow v. Comm’r (9th Cir. 2007) begs the questions: Are FLPs still a viable estate-planning tool?  What set of good facts might allow an FLP to escape the broad reach of IRC §2036, and/or fit within its exception for a “bona fide sale for full and adequate consideration”?

“This is a classic case of what not to do in any family limited partnership,” comments Mel H. Abraham, CPA, CVA, ABV, ASA, CSP.  Clearly, to strip all assets from an elderly person’s estate to fund an FLP “implies some agreement to invade the corpus of the FLP for the elder’s living expenses.”   Second, transferring property to an FLP without transferring the related debt (presumably to base any discounts on the full equity value), but then paying the debt from partnership assets is inconsistent with the intent to exclude the debt in the first place.  Lastly, disproportionate distributions directly and only to the partner who contributed the FLP’s primary asset, “certainly raises the question of the non-tax intent of the FLPs formation,” Abraham says.  “I also question whether they may have triggered an event under IRC §2701,” concerning special valuation rules in the case of transfers of certain interests in corporations and partnerships.

“You look at Bigelow as well as the recent Erickson v. Comm’r (Tax Court, 2007),” he adds, “and clearly the courts are telling taxpayers that the only way family limited partnerships are going to be feasible is if they are created timely, funded properly, operated appropriately and respected completely.”   For Abraham’s multi-media program on how to use FLPs as a wealth-preservation tool, go to Flpvaluation.com.