If you created a family limited partnership (or limited liability company) more than one year ago, it would be a good idea to review the operating procedures and to review and possibly amend the partnership agreement (or operating agreement). There has been a continuous stream of court cases on the tax efficacy of these entities. Taxpayers have won some cases and lost other cases, but in the process, the courts have provided some guidance as to the kinds of operating procedures and provisions in partnership and limited liability company agreements that are either helpful or harmful. It is important to make sure that the agreement for your entity contains all the helpful provisions and does not contain any of the harmful provisions, and that the operating procedures are appropriate. We would be happy to review these matters with you.

Last month, the Tax Court decided another family limited partnership case, Estate of Hilde E. Erickson, against the taxpayer. This was another “bad facts” case where the partnership was set up by the decedent’s daughter, acting under a power of attorney, when the decedent’s health was failing. Transfers of assets to the partnership did not occur until later, when the decedent’s health was even worse. Some transfers did not occur until two days before she died, and the gifts of partnership interests to other family members were not made until two days before she died. After her death, her estate had to make withdrawals from the partnership to pay expenses. The court had no trouble concluding that the decedent had retained an interest in the assets she transferred to the partnership, which caused all the assets to be included in her estate at full fair market value for estate tax purposes under IRC Section 2036. This is not the way to use a family partnership.

We have considerable experience in helping clients confirm the economic substance required to make a family partnership successful. We have also carefully studied all the court decisions and can prepare an updated agreement that contains the helpful provisions while avoiding the problematic provisions.