Structuring and Operating Family Limited Partnerships: Asset Protection and Income Tax Reduction

Last year's tax reform bill plus the Service's withdrawal of the controversial Section 2704 valuation regulations removes some uncertainty and complexity in using FLPs in estate planning but introduces others. While the increased estate-exemption amount lessens the need to take aggressive valuation discounts on assets transferred into an FLP, the structures retain significant asset protection and income tax savings features.

The general structure of an FLP involves a grantor transferring assets into a partnership, with the grantor serving as a general partner, thus retaining ownership and control over the transferred assets. The general partner then grants limited partnership shares to family members or other potential heirs/beneficiaries.

Estate planners can use FLPs to achieve income tax savings by arbitraging differing income tax rates among limited partner family members. By granting income shares to family members who may be in a lower income tax bracket, the general partner can reduce overall income taxes on income.

However, the new tax law created some complexities in the tax implications of operating FLPs, particularly in determining whether the Section 199A pass-through deduction is available to recipients of limited partnership interests under the capital ownership rules of IRC 704(e). Planners must be conversant in the 199A rules in structuring transfers of income-generating assets to an FLP to maximize pass-through deduction benefits.

Listen as our experienced panel provides a practical guide to funding and structuring a family limited partnership, as well as operating the FLP to withstand potential IRS scrutiny.

1. Using FLPs for asset protection and business continuation/succession planning
2. Structuring and funding options
3. Discounting options after rescission of Section 2704 regulations
4. Application of Section 199A deduction to FLPs
5. Income tax minimization opportunities
6. Business operation challenges
   1. Business purpose rules
   2. Using FLPs with trusts and other wealth transfer vehicles
   3. Distribution strategies
   4. Maintaining cash flow for transferor general partner

The panel will discuss these and other relevant topics:

• How does the new Section 199A pass-through deduction apply to family limited partnerships?
• Withstanding IRS scrutiny in operating an FLP for non-tax reasons under the business purpose rules
• Using distributions to shift income tax burden to limited partner family members with lower marginal income tax rates
• Strategies for funding FLPs through nontaxable transfers and sales
• Discounting factors under the new exemption amount in light of the rescission of the proposed Section 2704 regulations

Learning Objectives

After completing this course, you will be able to:

• Discern under what circumstances the Section 199A pass-through deduction may apply to family limited partnership operations
• Recognize how to meet the “business purpose” requirements of operating an FLP
• Identify asset protection and business succession benefits unique to FLPs operating active closely held businesses
• Determine strategies for shifting income tax burden from higher-taxed to lower-taxed family members

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite:

  Three years+ business or public firm experience at mid-level within the organization, preparing complex estate plans, tax forms and schedules, supervising other planners/attorneys. Knowledge and understanding of generation-skipping transfer tax and step up of income tax basis in estate planning.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).