With the onslaught of new tax laws you may be wondering if you should dissolve your FLP (Family Limited Partnership)? In short: no. If your FLP was formed for the appropriate reasons and was managed properly by your advisor this is no time to dismantle it. As a financial planner The Private Advisory Group strives for efficiency and accuracy of appropriately managing our client’s capital better. By using an FLP we can effectively do this. The following are five commonly used myths to dissolve an FLP. Below are reason why one shouldn’t do this.
1. The cost of maintaining an FLP (bookkeeping, tax returns, legal bills) is too great,
Why Not? Actually the truth is when and FLP is administered properly, there are no costs. Lamentably in an effort to save money and cut corners clients undermine the planning objectives that were the basis for originally setting up the FLP. Any costs should be offset by the benefits that the FLP is currently giving them. For instance, if a particular family has 10 different investment accounts, would they incur more costs with the management of those 10 individual accounts than using one aggregated FLP? If there is a savings using the FLP meaning the savings will be large enough to lower management fees then it’s worth it. Although an FLP requires more management its total costs are not incremental. Finally, what are the added benefits? They include but are not limited to asset protection, control, and avoidance of probate.
2. Dissolution is simple and shouldn’t cost much: just return my shares of the assets.
Why Not? Disturbing securities from an FLP to the partners may not be tax-free if the value of those securities exceeds the adjusted tax basis in the FLP. Your client needs a CPA to figure it out. Also, many FLP’s contain a variety of assets, from interests in a family business to marketable securities. Usually, different family members want different assets. That results in disproportionate distribution and that spells tax complexity.
3. Congress is repealing the gift and estate tax on FLP’s owning passive assets like securities and real estate, so why keep them?
Why Not? It’s a true statement that the Pomeroy bill H.R. 436 would just that. But this bill has been proposed before and hasn’t passes, so perhaps the same is still true and there is a window of planning opportunity. Further, FLP’s should never have been set up only to obtain gift- and estate-tax discounts. All those other benefits are unaffected by the gift- and estate-tax change, even if it does happen.
4. While an FLP can provide some asset protection, it’s not perfect.
Why Not? Few things in this life are perfect. However, this does not exclude the fact that we use them. If an FLP is properly operated and planned to maximize asset protection, It can provide a greater level of protection. There are also different types of risks that an FLP can protect against. Such as, divorce which can annihilate a clients assets. An FLP can help maintain the integrity of separate assets a client might receive, such as gifts or inheritance. FLP’s prevent a commingling of assets.
5. FLP’s are big tax audit triggers. It’s better to get rid of them so the IRS won’t know.
Why Not? Having an FLP interest, especially with discounts for lack of marketability or control, is a gift- and estate-tax hot button. But before you dismantle your FLP, step back. IRS gift- and estate-tax auditors are very sharp folks. If you filed gift-tax returns reporting early FLP gifts, they’ll know about it. Its routine on an estate –tax audit for agents to ask for more than two years prior income tax returns. So unless you dismantled the FLP years before death, its existence will be easy to spot. Most importantly, if you had real nontax savings motives for setting up an FLP, and you administered it properly, why hide?
ref: www.financial-planning.com Martin M. Shenkman. December 2009
Filed Under: Other Wealth Management Issues