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The value of assets transferred to a family limited partnership must be included in the decedents' estates for tax purposes, because they retained an implied right to the income from the assets during their lifetime, the 8th Circuit has ruled in affirming the U.S. Tax Court.
"We find no clear error in the tax court's determination that an implied agreement existed between the [decedents] and their four sons which allowed [the decedents] to retain the right to income from [the FLP] after its initial funding," the court said.
Estate planning attorneys see the decision as part of an ongoing trend of courts cracking down on FLPs that don't have a clear business or non-tax purpose.
"If there's no active investment and the whole thing is on auto pilot, then the court says, 'Why is the FLP there?'" said Dallas estate planning attorney Norman Lofgren, who practices with Looper, Reed & McGraw.
The IRS has been winning these cases by being selective about which ones to litigate.
"The government is picking ones with extreme facts like this," Lofgren said.
Dallas estate planning expert Steve Akers agreed.
"They don't like FLPs and view them as paper shuffling to get a discount, but they are only taking the bad facts cases to court," said Akers, who is the managing director of Bessemer Trust.
But the good news is that estate planners are seeing IRS agents approve significant FLP discounts in cases where the non-tax purpose of the partnership is clear.
"In lots of cases, where the facts are better, even if [an argument against the FLP is raised] it gets washed out in settlement negotiations in a taxpayer friendly way," said Owen Fiore, an estate planning consultant in Kooskia, Idaho.
The result is that IRS agents often allow FLP discounts "in the 25-30 percent discount range, and...