47.5% Discount for Post-Mortem Family Limited Partnership

Posted on September 8, 2009 by Bryan Howard

Family limited partnerships (or LLCs) are often used to obtain valuation discounts for estate and gift tax purposes. Appraisers typically conclude that the fair market value of an interest in a family limited partnership (“FLP”) is at least 35% less than the value of the assets owned by the FLP.

The IRS dislikes these discounts and has successfully challenged the discounts in several court decisions. As a general rule, the taxpayers were "sloppy" in the cases that the IRS has won. Errors were made either in funding, distributions, or record keeping.

When the FLP is properly funded and administered, taxpayers are able to substantiate the discounts. For every case in which the IRS has successfully disallowed discounts, there are many others where the court approved a discount or the IRS agreed to a discount without going to trial.

A case in point is the recent Rayford L. Keller et al v. United States decision. Mrs. Williams was in the hospital, dying from cancer. Six days before her death, she signed documents to establish an FLP to be funded with $240 million of bonds and $10 million cash.

The assets were not transferred to the FLP until one year after she died. Nevertheless, the Court ruled that her family was entitled to a 47.5% discount on the value of the bonds and cash that were transferred to the FLP.

I do not recommend waiting until death is imminent to establish an FLP. It is far better to establish the FLP when you have several years to live, and then to make gifts or sales of FLP interests when that is appropriate.

Detailed summary of Keller case by Steve Akers of Bessemer Trust Company, N.A.

Tags: , , , , , , , , ,

How Much Is Too Much for Your Children?

Posted on August 3, 2009 by Bryan Howard

Several of my clients are concerned about passing on too much money to their children. They fear that a large inheritance will inhibit their children from reaching their full potential.

One of my clients noticed a positive change in her children after informing them that her Will leaves all of her considerable fortune to charity. Her children now understand the need to become productive citizens if they intend to enjoy a comfortable lifestyle.

A handful of my clients have taken this approach of giving everything to charity, and nothing to their children. Others put a cap on the amount of the inheritance, for example $4 million per child.

Another approach is to leave the child’s inheritance in a trust that makes matching distributions to the beneficiary based upon a percentage of the beneficiary’s earned income. This type of trust is sometimes referred to as an Incentive Trust.

You will have to decide for yourself whether you might be doing harm to your child by leaving them a large inheritance. In my experience, a person’s “work ethic” has been fairly well determined by the time he or she attains age 30. If they already have a good work ethic when they receive their inheritance, they do not become lazy or irresponsible.

On the other hand, attempts to motivate lazy children through a meager inheritance or a restrictive trust have generally been unsuccessful. I have concluded that a person’s work ethic is more heavily influenced by their upbringing, especially the example set by their parents, than it is by the amount or structure of their inheritance.
 

Tags: , , , ,