Household Limited Partnerships and Divorce: Structuring the Department
Family Limited Collaborations can provide special challenges in divorce litigation relative to the department of property and debt. It is essential to comprehend the essential components, their structure and various appraisal methods in order to effectively represent a customer where a Household Limited Collaboration is part of divorce proceedings.
Establishing a Household Limited Collaboration (FLP) yields tax benefits and non-tax benefits.
Valuation discounts can be accomplished in two ways.5 Absence of marketability is one factor
Lack of control is another aspect that minimizes the “fair market worth” of a Family Limited
Over the years, the IRS has made arguments concerning discount rate assessments as abusive, especially when Household Limited Collaborations are established for absolutely nothing more than tax shelters.13 Sometimes the development of an FLP is motivated by customer’s desire to alleviate the burden of the federal estate tax.
Consequently, courts have started inspecting making use of FLPs as an estate-planning gadget. In order to receive 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 minimal partnership interest in the FLP. Upon death, the taxpayer’s gross estate consists of the value of the restricted collaboration interest rather of the value of the transferred possessions. 79 A non-controlling interest in a household deserves really little bit on the open market; as such, the estate will apply significant appraisal discounts to the taxable value of the FLP interests, thus decreasing the quantity of tax owed at the taxpayer’s death. 80 The Internal Revenue Service has been attempting to curb this abuse by including the entire value of the properties moved to the FLP in the decedent’s gross estate under Internal Income Code 2036( a). I.R.S. 2036( a) includes all property transferred throughout the decedent’s lifetime in the decedent’s gross estate when the decedent failed to abdicate enjoyment of or control over the properties subsequent to the transfer.
For example, in Estate of Abraham v. Comm’ r, 14 a representative of estate petitioned for redetermination of estate tax shortage emerging from inclusion of full date of death worth of 3 FLPs in estate The high court concluded that the worth of transferred assets were includable in the gross estate, considering that testator retained use and pleasure of property during her life. 15 The court stated, “a property transferred by a decedent while he lived can not be omitted from his gross estate, unless he definitely, unquestionably, irrevocably, and without possible bookings, parts with all of his title and all of his possession and all of his pleasure of moved property.”16 Through documentary proof and testimony at trial, it is clear that, “she continued to delight in the right to support and to upkeep from all the income that the FLPs generated.”17
Another example, Estate of Erickson v. Comm’r18, the Estate petitioned for a review of the IRS’s determination of including in her gross estate and the entire value of properties that testatrix transferred to a FLP soon prior to her death. The court concluded that the decedent maintained the right to have or enjoy the assets she moved to the collaborations, so the worth of transferred possessions must be included in her gross estate.19 The court said that the “property is included in a decedent’s gross estate if the decedent retained, by express or indicated contract, possession, enjoyment, or the right to earnings.20 A decedent retains ownership or satisfaction of moved property where there is an express or implied understanding to that result among the celebrations, even if the retained interest is not lawfully enforceable.21 Though, “nobody factor is determinative … all truths and scenarios” must be taken together.22 Here, the facts and scenarios show, “an implied agreement existed among the parties that Mrs. Erickson kept the right to possess or enjoy the assets she moved to the Partnership.”23 The transaction represents “decedent’s daughter’s last minute efforts to lower their mother’s estate tax liability while keeping for decedent that capability to use the properties if she required them.”24
Also, in Strangi v. Comm’r25, an estate petitioned the Tax Court for a redetermination of the shortage. The Tax Court discovered that Strangi had actually kept an interest in the moved 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 decision. I.R.C. 2036 provides an exception for any transfer of property that is a “authentic sale for a sufficient and complete consideration in loan or loan’s worth”.27 The court said “appropriate factor to consider will be pleased when properties are moved into a collaboration in exchange for a proportional interest.”28 Sale is bona fide if, as an objective matter, it serves a “substantial organisation [or] other non-tax” function.29 Here, Strangi had an implied understanding with family members that he could personally utilize collaboration possessions.30 The “benefits that party maintained in transferred property, after conveying more than 98% of his total properties to minimal collaboration as estate planning device, consisting of periodic payments that he got from partnership prior to his death, continued usage of moved house, and post-death payment of his numerous financial obligations and costs, certified as ‘considerable’ and ‘present’ advantages.”31 Accordingly, the “authentic sale” exception is not triggered, and the moved assets are effectively consisted of within the taxable estate.32
On the other hand, non-taxable benefits occur in two circumstances: (1) family business and estate planning goals, and (2) estate related benefits.33 Some advantages of household organisation and estate planning objectives are:
– Ensuring the vitality of the household organisation after the senior member’s death;
The copying was presented in the law review article: “if the relative collectively owns apartment buildings or other ventures requiring ongoing management, moving the business in to an FLP would be an ideal approach for ensuring cohesive and efficient management.”35 As far as estate associated advantages are worried, a Household Limited Collaboration protects possessions from financial institutions by “limiting property transferability.”36 In other words, a lender will not have the ability to access “amount of the assets owned by the [Family Limited Collaboration]”37
1 Lauren Bishow, Death and Taxes: The Household Limited Partnership and its usage on estate.