A common technique with large Florida Estate Planning is the use of FLP’s or Family Limited Partnerships. Neil Hendershot of the PA Elder, Estate & Fiduciary Law Blog summarized the recent highlights of the Heckerling Institute where they discussed those issues in detail.
The most important issues dealt with making sure there was
(1) not a gift on formation of a family limited partnership. This can be done by making sure the partnership is property funded and the capital accounts are credited. The recommendation was that during the next tax year he or she transfer partnership interest. This helps to avoid the argument that the transfer was contemplated at the time of the capital contribution. See Senda, T.C. Memo 2004-160 (July 12, 2004). One must also take this into consideration with additional contributions because they are valued with the amount given instead of a discounted valuation.
(2) Avoiding Bad Facts based on formation and operation. You do not want to have these issues used to devalue the discount on the entity.
• Disproportionate Distributions to senior family members.
• Distributions that cover senior family member’s expenses.
• Do not create the partnership by an agent acting under power of attorney.
• Do not use partnership funds to pay estate taxes after death. If this looks like it will be necessary consider using a life insurance policy or a hands length loan from the partnership to fund those expenses if it is necessary.
(3) Senior family member should have no control at death or within 3 years of death to avoid an inclusion look-back period under IRC § 2035. If the senior family member must serve as a general partners remove “sole and absolute” authority language and any overly protective clauses.
(4) FPL’s should be created for legitimate non-tax business purposes to avoid inclusion arguments. It is likely that the drafting attorney will provide testimony of the non-tax reasons. It might be advisable to use a separate attorney to draft the agreement who has no knowledge of the discounting opportunities when creating a Family Limited Partnership for Florida Estate Planning
(5) Potential problems arise with using a martial trust for the benefit of a surviving spouse. These interests may not get the same discounted treatment which can cause problems.
(6) Be careful with the 100 Shareholder rule when using S corporations as it is possible to have more than 100 shareholders when you look at all family members who are lineal descendants up to six generations including current and former spouses.
(7) Nonresident aliens or other non-approved shareholders can create problems with S corporations.
(8) S corporations can only have a single class of stock and all must have equal rights. Look out for disproportionate distributions, buy-sell installments, and split-dollar arrangements
The article goes on to discuss other concerns and should be reviewed by anyone looking to create a Family Limited Partnership for Florida Estate Planning