Family Limited Partnership saves family $120,000

If you’ve been wondering how a family limited partnership can save your family taxes, here’s a good example. 

Bianca Gross was a widow who invested in stocks.  She had two daughters.  She decided to create a family limited partnership, in part so she could involve her daughters in her investment decisions and teach them about investing.  Bianca became the general partner, and the daughters became limited partners.  Bianca had complete management control over the partnership, and the daughters were not allowed to sell their shares or dissolve the partnership.

After the partnership was created, Bianca contributed a little over $2 million worth of stocks to it.  Eleven days later, she gave away about 45% of her partnership interest, divided into equal shares for the two daughters.  Each daughter in effect got about $480,000 worth of stock.

However, when Bianca filed her gift tax return, she listed gifts to each daughter of only $312,500.  Why? Because she “discounted” the value of the stock by 35% to reflect the fact that the daughters didn’t receive it outright.  Instead of receiving stock that they could immediately sell, the daughters received partnership interests that they couldn’t sell, reflecting assets over which they had no control.

The IRS disagreed. It said Bianca had really just made an indirect gift to the daughters of the full $480,000 and it demanded an additional $120,000 in taxes. But the U.S Tax Court sided with Bianca.  It said what she did was proper and legitimate transaction.

Among other things, the court noted that 11 days passed between the time the stocks were given to the FLP and the time the FLP interests were given to the daughters.  During that time, it said the value of the stocks could have changed considerably, so it wouldn’t be proper to consider the two gifts simply as one indirect gift.

The court did note that if Bianca had done the same thing with an asset that wasn’t likely to change in value in 11 days, such a long-term government bond, the result might be different.

This case is a good example of how a family limited partnership can enable you to transfer assets to your children while saving taxes.

Of course creating a family limited partnership requires some effort.  You have to legally create a partnership and follow the partnership rules.  You need to have some legitimate business purpose.  And you can’t just put all your assets into the partnership, because it must be a “real” partnership – you cant “dip into” it for personal expenses. But if you are willing to observe the formalities, an “FLP” can be a great way to reduce gift and estate taxes – and perhaps pass along some valuable business or investing know how at the sa

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