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Double discounts available on gifts involving family limited partnerships
Posted in Estate Planning

A family limited partnership (FLP) is an effective vehicle for minimizing estate and gift taxes if properly structured. In a FLP, the donating family member (e.g., a parent) commonly serves as the general partner. He or she retains control over the assets in the FLP and transfers limited partnership interests to other family members (e.g., children). Because limited partnership interests in a FLP carry little or no control over the FLP’s assets, and because the limited partners do not control when the partnership assets become fully available to them, the value of such interests to a hypothetical purchaser is significantly lower than the value of cash gifts in the same amount. Therefore, sometimes substantial discounts for lack of control and lack of marketability can be applied to such gifts of limited partnership interests. 

In an important FLP tax case, Astleford v. Commissioner (2008), the U.S. Tax Court confirmed that these discounts can be applied both to a gift of a limited partnership interest and to the value of partnership or LLC interests owned by the partnership. In this case, the parent initially contributed a FLP her ownership interests in 15 different investments, and almost simultaneously gifted a 30% limited partnership interest to each of her children. Some time later, the parent contributed her 50% general partnership interest in a partnership that held valuable real estate to the FLP and again transferred a limited partnership interest in the FLP to the three children, so that each child held a 30% limited partnership interest. The IRS believed that the 50% general partnership interest should not be entitled to discounts, since the gifts of FLP interests to the three children would also be discounted. The Tax Court disagreed, however, and allowed a 30% discount on the value of the general partnership interest held by the FLP and then another roughly 40% total discount on the value of the limited partnership interests given to the children. 

Without the discounts allowed in this case, the total value of the various interests that could have been taxed was approximately $12.8 million. The discounts reduced the taxable total value to about $8.4 million. In other words, these double discounts for lack of control and lack of marketability reduced the taxable amount by roughly $4.4 million, thereby saving the taxpayers millions in tax.

  • Partner

    John is a partner in the firm's Estate Planning Department. He focuses his practice on estates, trusts, family business and disability planning, and the administration of estates and trusts. John also has an active health law ...

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