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Family limited partnerships (FI.Ps) have become increasingly popular in recent years as a means to transfer family wealth to successive generations. FLPs can facilitate lifetime gifting while allowing the donor to remain in control of the assets as the general partner.
As effective as FLPs are, there are limitations on their use with certain assets such as S corporation stock, personal residences, and IRAs. Although other estate planning tools such as the grantor retained annuity trust and the qualified residence trust can be used to transfer S corporation stock and personal residences, there have not been any effective estate planning vehicles used for lifetime planning with IRAs.
By using an FLP as an IRA asset, it might be possible for taxpayers to achieve the best of both worlds for estate and income tax planning purposes. The idea is illustrated as follows: A taxpayer with an IRA forms a family limited partnership in which she, her IRA, and an irrevocable trust are partners. The IRA must own more than 50% of the partnership. The irrevocable trust will be the general partner. Each partner will be required to make a nominal capital contribution to the partnership in return for its initial partnership interest.
The irrevocable trust would have sole authority to manage the partnership assets as general partner. The general partner would be permitted to invest partnership assets in any investment permitted by the partnership agreement. The partnership would be authorized to invest in an insurance policy that insures the life of the participant. The following requirements would be imposed by the partnership agreement relating to insurance policies purchased:
The partnership would be the designated beneficiary of the policy.
The general partner (the irrevocable trust) would contribute that amount toward the purchase of the insurance contract which is equal to the P.S. 58 amount.
The balance of the premium would be paid by the limited...