Family Limited Partnerships
2005 - 06/08 Mark J. Bradley

Two recent Tax Court cases (Estate of Virginia A. Bigelow (T.C. Memo 2005-65) and Estate of Wayne C. Bongard (124 TC No. 8)) reflect the IRS’s continuing attack on the validity of family limited partnerships that do not have valid non‑tax purposes.

In Bigelow the estate argued that the partnership provided asset protection from creditors, provided continuity of management of the property, and was an efficient vehicle for the founders to make gifts.  The Tax Court did not agree with these three non-tax purposes based upon factual conclusions.

In Bongard, the estate contended that the non-tax reasons to create the partnership included: to provide “another layer of creditor protection for the decedent,” to make gifts, and to acquire, own, and sell stocks.  The Tax Court concluded that the partnership never diversified its assets during the decedent’s lifetime, it never had an investment plan, it never functioned as a business enterprise, or engaged in any meaningful economic activity.  The court indicated that there was no significant change in asset protection, and that the decedent did not make gifts of partnership interests prior to his death.

Both of these cases should alert those who have existing family limited partnerships to review their procedures to help substantiate the non-tax reasons for the partnership.  Partners should meet periodically to review investments, long-term decisions, whether cash distributions should be made to the partners, and partnership financial statements.  The conferences should be documented through minutes.

These two cases, and others, suggest that the person who initially created the partnership should pool his/her assets with other family members and that investment decisions should be made by a consensus of the general partners.  If there is a corporate or LLC general partner, its shareholders or members should meet periodically to establish the investment decisions for the partnership, and the meetings should be documented.  Furthermore, changes in any marketable securities held by the partnership and changes in the distribution plan help to reflect that the partner who initiated the partnership had a meaningful change in the investments initially contributed to the partnership.

Based upon Bigelow and Bongard, a significant change in the administration and management of the partnership assets will help establish that there was more than merely a name change and a different “wrapper” around the assets.  In this regard, children should actively represent their interests (preferably as general partners, such as members or shareholders of the LLC or corporate general partner) rather than just comply with what their parents suggest based upon how partnership assets were invested prior to the time of the partnership contribution.

The IRS is keenly aware of these cases.  Clients who have family limited partnerships need to verify that their partnerships are being operated in such a manner that their families can establish significant non-tax benefits for partnership creation and operation.

If you have questions about the operation of your family limited partnership, please feel free to contact any member of our Trusts & Estates Practice Group.

© 2005 Ruder Ware, L.L.S.C. Accurate reproduction with acknowledgment granted. All rights reserved.
This document provides information of a general nature regarding legislative or other legal developments. None of the information contained herein is intended as legal advice or opinion relative to specific matters, facts, situations, or issues, and additional facts and information or future developments may affect the subjects addressed.