Family Limited Partnerships Under Attack: Is the End Near?

Abstract

Family Limited Partnerships (FLPs) represent unique vehicles for transferring wealth, such as family businesses, from one generation to another, permitting parents to gradually transfer business ownership to children while maintaining control over operations.  FLPs also serve as significant shields against the effects of gift and estate taxes, since valuation discounts can be employed to reduce the fair market value of partnership interests transferred to children and other family members.  However, these tax savings have resulted in aggressive audit and court challenges by the IRS.  For accountants, responding to these challenges for their clients means understanding both how the financial and tax aspects of FLPs operate.  This article details the critical nontax aspects of FLPs and presents a thorough examination of current tax developments, including the June 2002 appellate court decisions.  Finally, the article discusses specific steps accountants should take in advising their clients to protect family assets and defend against IRS attacks.