Minimizing transfer taxes is just one of the benefits.
Indeed, creating a family limited partnership will save you in transfer taxes, according to a recent ThinkAdvisor article titled “Estate Planning: The Family Limited Partnership Strategy.”
But minimizing tax transfers cannot be the only reason for using this tool.
What happened with the Purdue family case?
The Purdue family had an estate of $28 million and had five children.
To couple created the Purdue Family LLC and funded it with about $22 million in assets, including securities.
They also created a trust to benefit their descendants.
The trust was funded with interests in the LLC.
The operating agreement for the LLC included non-tax purposes for its existence.
What were they?
- Avoiding fractionalizing ownership,
- Retaining assets within the extended family,
- Protecting assets from future unknown creditors, and
- Providing flexibility in managing the assets that would not be available in other entities.
Mr. Purdue also created several other trusts including a qualified terminable interest property trust (QTIP).
When Purdue passed away, his QTIP trust and trust beneficiaries loaned the estate money to pay the estate tax.
The IRS was not satisfied and challenged the structure of the trusts.
A key code in the case was Tax Code § 2036?
It requires property transferred to a trust, in which a decedent holds an ownership interest, to be included in his or her gross estate with one exception.
The property may be transferred for adequate consideration.
The estate had to prove there were lawful and practical reasons for creating the family LLC other than merely tax benefits.
The Tax Court ruled in favor of the Purdue estate.
They found seven compelling reasons for creating the trust:
- Keeping the decedent from having to manage investments,
- Reducing instability in investments by consolidating them under one advisor,
- Teaching the children to manage an investment company together,
- Circumventing repeat asset transfers among different generations,
- Combining asset ownership to meet minimum investment requirements and efficiently managing investments,
- Providing guidelines for resolving disputes and restricting transfers, and
- Giving the beneficiaries minimum annual cash flow.
Not everyone would need such a complex estate planning tool.
Regardless, working with an experienced estate planning attorney can help you determine what is best for your family.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: ThinkAdvisor (March 14, 2017) “Estate Planning: The Family Limited Partnership Strategy”