With your Family Limited Partnership or Limited Liability Company

February, 2009
By Gary Pittsford, CFP®
President and CEO, Castle Wealth Advisors, LLC

Your Limited Liability Company or Family Limited Partnership can be important financial entities to benefit your family in many ways, but they must be used properly. We don’t want you to make the same mistakes others have. To help you understand what to avoid, we’ve outlined three court cases that will illustrate what you shouldn’t do. In each of these cases the families didn’t follow normal operating procedures for establishing or using these entities properly.

ESTATE OF GORE

In this case, the 8th Circuit ruled that Mrs. Gore did not officially transfer control of her bank accounts and stock certificates into her Family Limited Partnership. Official documents were created assigning assets to the partnership, however…

  • She failed to change the name on any of the assets.
  • She did not surrender any voting rights associated with the assets.
  • She continued to personally collect income and dividends produced by the assets.

While Family Limited Partnerships can be an excellent business tool to own and control family assets, they must be handled properly in order to help the family in the long run. If you decide to establish a Family Limited Partnership, you should have a good business plan that outlines your goals, then follow that plan.

If you wait until a parent gets sick, then begin transferring assets quickly, you’ll find tax courts will see this as an attempt to avoid paying estate taxes.

ESTATE OF ERICKSON

A new Family Limited Partnership was created some time ago, but the assets were not transferred into the new FLP until two days before Mrs. Erickson’s death. This delay and disregard of the terms for the FLP tells the tax court that the creation of the FLP was not strictly for business purposes.

The Erickson’s estate received disbursements from the FLP to pay approximately $200,000 in estate and gift tax liabilities that the estate was unable to otherwise pay. However, none of the other partners received a proportionate distribution.

BIGELOW VS. COMMISSIONER

The 9th Circuit ruled that Mrs. Bigelow did not relinquish the economic benefits of the assets she transferred into her Family Limited Partnership. She continued to live rent free in a home that was owned by the FLP. And income from the FLP was used to pay Mrs. Bigelow’s personal loans.

While each of these families made mistakes transferring assets into their new entities or working with those new companies, we want you to know that when used properly a Corporation, Limited Liability Company, or Family Limited Partnership can be an excellent tool for your family to work with in managing and controlling assets. However, certain business rules must be followed and that is when you should listen to your legal and financial advisors.

Let’s summarize the four pitfalls you should avoid when transferring assets or working with a new entity:

  • Transfer assets in a timely manner.
  • Comply with partnership or LLC formal agreements.
  • Relinquish economic benefits of the assets you have transferred.
  • Transfer assets at their fair market value.

Source Citation

Estate of Gore, T.C. Memo, 2007-169 (June 27, 2007)
Estate of H.E. Erickson, T.C. Memo, 2007-107 (April 30, 2007)
Bigelow v. Commissioner, 100 A.F.T.R2d 2007-6016 (9th Cir. 2007)

Gary Pittsford, CFP®, is President and CEO of Castle Wealth Advisors, LLC. Castle specializes in helping families and closely held business owners with valuations, succession planning, estate and income tax analysis and retirement income security. Castle’s senior partners work with clients throughout the country in making logical decisions that help them fulfill their personal and business financial goals. For more information visit www.Castle3.com, call 1-888-849-9559 or e-mail Gary directly at .