Family Limited Collaborations can provide unique challenges in divorce litigation relative to the division of property and debt. It is important to understand the key elements, their structure and different evaluation techniques in order to effectively represent a customer where a Household Limited Partnership becomes part of divorce proceedings.
Establishing a Household Limited Collaboration (FLP) yields tax benefits and non-tax benefits.
Valuation discount rates can be achieved in two methods.5 Absence of marketability is one factor
Lack of control is another aspect that reduces the “reasonable market worth” of a Family Limited
Over the years, the Internal Revenue Service has made arguments regarding discount rate evaluations as abusive, especially when Family Limited Collaborations are established for absolutely nothing more than tax shelters.13 In some cases the development of an FLP is motivated by customer’s desire to eliminate the problem of the federal estate tax.
Consequently, courts have started inspecting the use of FLPs as an estate-planning device. In order to get the tax benefit, the taxpayer forms an FLP with member of the family and contributes assets to the FLP. 78 In exchange for this contribution, the taxpayer gets a restricted partnership interest in the FLP. Upon death, the taxpayer’s gross estate consists of the value of the limited collaboration interest instead of the worth of the transferred possessions. 79 A non-controlling interest in a family deserves very little on the open market; as such, the estate will use substantial assessment discounts to the taxable worth of the FLP interests, thereby reducing the quantity of tax owed at the taxpayer’s death. 80 The IRS has actually been trying to suppress this abuse by including the entire worth of the assets moved to the FLP in the decedent’s gross estate under Internal Earnings Code 2036( a). I.R.S. 2036( a) includes all property moved throughout the decedent’s lifetime in the decedent’s gross estate when the decedent failed to abdicate pleasure of or control over the possessions subsequent to the transfer.
For example, in Estate of Abraham v. Comm’ r, 14 a representative of estate petitioned for redetermination of estate tax deficiency emerging from inclusion of full date of death value of 3 FLPs in estate The trial court concluded that the worth of moved assets were includable in the gross estate, because testator retained usage and pleasure of property throughout her life. 15 The court said, “a possession transferred by a decedent while he was alive can not be left out from his gross estate, unless he absolutely, unquestionably, irrevocably, and without possible reservations, parts with all of his title and all of his belongings and all of his satisfaction of moved property.”16 Through documentary evidence and testimony at trial, it is clear that, “she continued to take pleasure in the right to support and to maintenance from all the earnings that the FLPs created.”17
Another example, Estate of Erickson v. Comm’r18, the Estate petitioned for a review of the Internal Revenue Service’s decision of consisting of in her gross estate and the entire worth of assets that testatrix moved to a FLP shortly before her death. The court concluded that the decedent maintained the right to possess or enjoy the properties she moved to the collaborations, so the value of moved properties need to be consisted of in her gross estate.19 The court stated that the “property is consisted of in a decedent’s gross estate if the decedent maintained, by reveal or suggested contract, possession, pleasure, or the right to earnings.20 A decedent maintains ownership or pleasure of transferred property where there is an express or implied understanding to that result among the celebrations, even if the maintained interest is not legally enforceable.21 Though, “nobody factor is determinative … all truths and scenarios” must be taken together.22 Here, the realities and circumstances show, “an implied agreement existed among the celebrations that Mrs. Erickson maintained the right to possess or delight in the possessions she moved to the Collaboration.”23 The deal represents “decedent’s child’s last minute efforts to reduce their mom’s estate tax liability while retaining for decedent that capability to use the assets if she needed them.”24
Also, in Strangi v. Comm’r25, an estate petitioned the Tax Court for a redetermination of the shortage. The Tax Court found that Strangi had actually maintained an interest in the transferred properties such that they were correctly included in the taxable estate under I.R.C. 2036(a), and got in an order sustaining the shortage.26 The estate appealed. The appeals court affirmed the Tax Court’s choice. I.R.C. 2036 offers an exception for any transfer of property that is a “authentic sale for a sufficient and full consideration in money or loan’s worth”.27 The court stated “sufficient factor to consider will be satisfied when possessions are transferred into a partnership in exchange for a proportional interest.”28 Sale is authentic if, as an unbiased matter, it serves a “considerable service [or] other non-tax” purpose.29 Here, Strangi had a suggested understanding with household members that he might personally use partnership properties.30 The “benefits that celebration retained in moved property, after communicating more than 98% of his overall properties to limited partnership as estate planning gadget, including routine payments that he got from partnership prior to his death, continued use of moved house, and post-death payment of his different financial obligations and expenditures, qualified as ‘significant’ and ‘present’ advantages.”31 Appropriately, the “bona fide sale” exception is not triggered, and the moved assets are appropriately consisted of within the taxable estate.32
On the other hand, non-taxable advantages occur in two situations: (1) household company and estate planning goals, and (2) estate associated benefits.33 Some advantages of family organisation and estate planning objectives are:
– Making sure the vitality of the household organisation after the senior member’s death;
The following example was presented in the law evaluation short article: “if the relative collectively owns house structures or other ventures requiring continuous management, moving the service in to an FLP would be an ideal method for guaranteeing cohesive and efficient management.”35 As far as estate related benefits are concerned, a Family Limited Partnership secures properties from creditors by “limiting property transferability.”36 Simply put, a lender will not be able to gain access to “amount of the assets owned by the [Family Limited Collaboration]”37
1 Lauren Bishow, Death and Taxes: The Family Limited Collaboration and its use on estate.