Family Limited Partnerships: The Beat Goes On

Abstract

It is increasingly common for the older generation to form family limited liability entities (FLLEs), which are usually either limited partnerships or limited liability companies. The older generation then gifts the FLLE interests to the younger generation and/or leaves them to the younger generation as part of its estate. For estate or gift tax purposes, substantial valuation discounts are taken off what would be the proportional value of the underlying assets. These valuation discounts are commonly taken because the relevant FLLE interests lack control and are usually not as readily marketable as the underlying assets would have been. Discounts of 35% or greater are not unusual.

If unqualifiedly allowed, this technique would be an estate tax bonanza. With a bit of slight of hand, the value of an estate could be dramatically reduced with perhaps little change in the underlying beneficial ownership or use of the assets. Tax advisors and their clients love it. The Service does not. The Tax Court has taken a tough line, usually applying I.R.C. - 2036 to ignore the FLLE and include the assets contributed to the FLLE in the decedent's estate. The 3rd and 5th Circuits (and to a much lesser extent the 1st Circuit) have had something to say on the subject as well. They have not been particularly taxpayer-friendly either. The article discusses and analyzes the relevant case law and makes recommendations for reform.

Keywords: family limitied liability entities, FLLEs, limited partnerships, limited liability companies, estate taxes, gift taxes, Internal Revenue Code, taxation

JEL Classification: H20, H29, K34