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From the August 2005 issue of Investment Advisor • Subscribe!
August 1, 2005
Document a legitimate business and non-tax purpose for creating the partnership. Reducing estate taxes and facilitating gift giving should be ancillary to the partnership's primary purpose.
- Comply with the formalities established for partnerships under state law and the operating agreement.
- Treat the partnership as an ongoing business, and maintain capital accounts for all partners.
- If the donor's revocable trust will act as a general partner, it should not be the sole partner.
- Create management contracts for the general partners that prescribe the manager's duties and the amount of management fees.
- Make income distributions proportionate to the partner's ownership interest, contribution, or services.
- Retain sufficient assets outside the partnership to pay for the client's basic living expenses.
- Use caution when funding the FLP solely with publicly traded securities. At the very least, have an investment policy statement and actively manage the portfolio.
- If the purpose of the FLP is to pool family wealth for enhanced diversification and better management, the children should make significant monetary and management contributions to the FLP. General partners should meet regularly and keep minutes of their discussions.
- Don't commingle partnership funds with the donor's personal funds.
- Leave some time between the creation of the FLP and the transfer of partnership interests to the next generation. Otherwise, the transfer may be treated as an outright gift of the underlying asset to the limited partners.
- Substantiate the fair market value and valuation discounts at the time of each transfer of each limited partnership interest.
- File timely gift tax returns to start the statute of limitations, even if no gift tax return is necessary.
- Finally, don't wait until your deathbed or incapacity to do estate planning!