01 Nov Will the IRS audit our family limited partnership?
Q. Many years ago my husband and I formed a family limited partnership wherein we gave each of our children a 49 percent share and my husband and I each hold 1 percent. At this point we are interested in disbursing the assets to our children and closing out the account. Our financial advisor said it could spark an audit from the IRS because the IRS does not look favorably at this type of account. What advice can you offer?
A. Your advisor is correct about the IRS, but as in all things, the devil is in the details.
A family limited partnership (FLP) is a sophisticated wealth transfer and management technique that allows for the division of illiquid, indivisible assets, such as real estate, into units available for gifting, said Jodi Cirignano, a certified financial planner and certified public accountant with Lassus Wherley, a subsidiary of Peapack-Gladstone Bank, in New Providence.
She said FLPs often serve the dual purpose of transferring wealth to family members – the limited partners – in a tax-efficient manner while enabling the creator, called the general partner, to retain some control over the assets.
Cirigano said a properly structured FLP provides the opportunity to discount the value of the transferred assets and reduce gift and estate taxes.
Proper structuring may include creating a formalized partnership agreement with certain provisions, obtaining an appraisal of the assets to be transferred, complying with tax laws and maintaining adequate partnership records, she said.
“As you pointed out, the IRS pays close attention to FLPs,” she said. “The IRS views many FLPs as sham transactions solely created to avoid taxes, and may challenge the taxpayer to substantiate the FLP’s business purpose and any valuation discounts taken on the transferred assets.”
FLPs are highly complex, and the specific facts and circumstances associated with your FLP will dictate the correct course of action. We recommend that you obtain legal advice from a trust and estate planning attorney with specific expertise with this wealth transfer strategy.
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This story was originally published Nov. 1, 2019.
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.