Family limited partnership (the “FLP”) is a popular estate planning strategy, whose use has proliferated over the last decade. Attorneys, accountants and financial planners quickly point out the benefits of such planning to their clients, but often gloss over the requirements of ongoing maintenance. In doing so, clients lack the knowledge necessary to duly manage their FLPs. Without proper attention, all the wonderful benefits of the FLP might evaporate upon an audit by the IRS. Though certainly not exhaustive, the following represent common breaches in FLP maintenance:
- Corporate Compliance – A central element of this planning is developing a legitimate business purpose for the FLP. Execution of proper governing practices is essential to support this position. Common errors in this area include: failure to file annual state registrations, failure to hold annual partner meetings and failure to document partner actions.
- Distributions – Despite being a simple concept, distributions from the FLP should be made only to the owners. Nonetheless, many parents continue to receive distributions after transferring their ownership interests away.
- Proper Accounting – The FLP should maintain separate and complete accounting records. This includes accurately recording the assets, liabilities, revenues and expenses of the FLP. For example, depositing the revenues in and paying the expenses from bank accounts of the FLP are essential steps to properly operating the FLP. Many FLP owners move funds among related entities and family members, harming the integrity of the business purpose.
These represent only a few pitfalls in FLP maintenance. Akin to a diligent owner taking his or her vehicle for regular, scheduled service, the prudent FLP owner considers an annual tune up, as well. Engaging an attorney or a CPA familiar with FLP planning to conduct an annual review might prevent a costly bill from the IRS in the future.
For more information on Family Limited Partnerships, please contact Jeremy Wilson at firstname.lastname@example.org or (404) 220-8494.
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