Family Limited Partnership Still Useful in Estate Planning

Family Limited Partnership Still Useful in Estate Planning

Over the years family limited partnerships (FLPs) have experienced their fair share of scrutiny by the IRS and the courts.   However, as evidenced by the Fifth Circuit's opinion in Keller v. United States, 2012 US App LEXIS 20119, FLPs can be a very useful tool for protecting assets and reducing the amount of federal estate tax. In Keller, the Court upheld a $115 million estate tax refund upon determining that bonds were successfully transferred to a FLP before the decedent's death.

Prior to her death, the decedent met with legal and financial advisors to establish a FLP and fund the FLP with bonds then held in trust.  Although the partnership agreement was signed before the decedent's death, there was a lack of documentation permitting the actual transfer of the initial capital contribution to the FLP. Under Texas Law the District Court determined, and the 5th Circuit affirmed, that the decedent's intent to transfer the bonds to the FLP was sufficient to transfer the bonds despite any lack of record or writing confirming the transfer.

While the opinion in Keller is largely dependent on the interpretation of Texas law as to whether the FLP had been formed prior to the decedent's death, once it was determined that the FLP was formed, the estate was entitled to a discount on the value of that interest to reflect restrictions on the interest's transferability and other burdens on the partnership interest.  Also, the sale of bonds held by the FLP to pay the estate tax was correctly structured as a loan from the FLP back to the estate for tax purposes, which allowed the estate a corresponding deduction for the interest on the loan.

Although practitioners avoid at all costs the situation in Keller whereby the formation of the FLP is questioned, the Keller case illustrates that for large estates, using a FLP is still a very effective way to protect assets and take advantage of the valuation discount applied to partnership assets.

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