Closing the Loophole on Family Limited Partnership

In the past few decades, estate planners have found ways to reduce the amount of taxes paid when transferring marketable assets into trusts. The estate planners have used entities such as family limited partnerships (FLP) or family limited liability companies (FLLC). The marketable assets are held within the FLP or FLLC and then transferred to trusts for the taxpayer’s children. This in essence discounts the marketability of the gifts by 25% to 40%.

Since the IRS is not getting what they deem their fair share, this strategy has been labeled as abusive. With no effective legislation to control the use of the FLP and FLLC, the Treasury has proposed regulations aimed at curbing these transfers. While the IRS has recently conceded that there should be some discount applicable to the transfer of the family entity, they argue over the size of the discount.

These regulations have been expected over the last few years, and are getting closer to being finalized, many advisors are recommending that the transfers of those that may be affected by the change get done early before the rules become final.

While the IRS hopes the new regulations will disallow the discounts on value for FLPs and similar entities from being controlled by a single family or members of a single family with a small number of outsiders added for the purpose of avoiding Section 2704, the taxpayers that this will effect are hoping that is will not be retroactive.

The Treasury has allowed a generous window to provide the opportunities for families to use the entities until the end of the year. There is a 90-day comment period with comments due by November 2, 2016 and a hearing scheduled for December 1, 2016. The final regulations will not take effect until the end of December giving advisors time to set up an FLP or FLLC and get the benefits of the discounts like they would today. The window is closing and now is the time to take advantage of the opportunity.