Families Should Have a Legitimate Business Purpose to Avoid Misuse of Family Limited Partnerships

Families used to take advantage of family limited partnerships to centralize management of real estate and money.  The tool is making a comeback now that the 2013 exemption is so uncertain. However, wealth advisors caution against using a family limited partnership when it is not right for your situation.  Some families put too much into a partnership and discount it too much, which draws the IRS’s attention.  Advisors are concerned that less sophisticated families will put everything into a family limited partnership and just forget about taxes.

The IRS is most often concerned with family limited partnerships set up to avoid estate taxes, so families with legitimate business purposes to set one up are more likely to be in the clear. Several different families that have experienced success with family limited partnerships all had a legitimate business purpose attached to the formation of the partnership.  Each family reports that the family partnership has been very beneficial and one family says that it has served to keep his children together over the shared economic interest of everyone.

See Paul Sullivan, In an Unusual Tax Year, the Wealthy Turn to Partnerships, The New York Times, Jul. 6, 2012. 

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