Update on Family Limited Partnerships

The Internal Revenue Service has recently put tax planners and their clients on notice that the IRS will take a close look at family limited partnership arrangements. Family limited partnerships often hold appreciating assets such as real estate or marketable securities. If a limited partnership interest is gifted, the value of the gift is determined taking into account various valuation discounts.

In the case of a family limited partnership formed to hold investment securities, if there is no substantial business purpose for the partnership other than tax savings, the IRS may disregard the partnership entity and treat the securities as being owned by the partners directly. The result would be to limit, or eliminate altogether, the valuation discount for gifted limited partnership interests.

There can be numerous other hurdles in achieving the estate, gift, and income tax consequences desired in forming family limited partnerships and careful consideration is advised. As with many tax issues, the factual context of a transaction can make the difference between successful tax planning and a failed tax-saving strategy.