Estate Planning with FLPs

With the likely reduction of the current $5,120,000 exemption looming, many individuals are considering creating family limited partnerships to leverage more than the allotted $5,120,000. However, if you underestimate the value of the FLP units given away when attempting to reach the $5,120,000 mark, your estate could owe several hundred thousand dollars in gift tax. Fortunately, a recent Tax Court decision has helped with the problem of underestimating the value of FLP units.

In that case, Mr. Wandry gifted units of his FLP that were designated as being a certain dollar amount. The court ruled that in the event of an IRS audit or court decision that changed the dollar amount of the units, an adjustment of ownership units would be made based on the revised value. While the court did not specify as to how individuals were to straighten out the income tax problem left behind after a value adjustment, individuals can avoid the problem by making gifts to an intentionally defective grantor trust (IDGT). The giving party is treated as the owner of the trust for income tax purposes even though the gift is completed for transfer tax purposes.

See Peter J. Reilly, Doctor Who Is Too Busy Defending Earth to Help With Your Estate Plan? Maybe You Don’t Need Him, Forbes, Apr. 1, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.