UPCOMING EVENTS

SEMINARS FOR SEPTEMBER 2016

MONROEVILLE / PITTSBURGH
Tuesday, September 13, 2016
2:00PM
Courtyard Marriott / Monroeville
3962 Wm Penn Highway
Monroeville, PA 15146
Between Sheetz and Eat ‘n Park
 
MURRYSVLLE / DELMONT
Tuesday, September 13, 2016
7:00PM
Holiday Inn Express
Delmont/Murrysville
6552 Route 22
Delmont, PA 15626
Behind Lamplighter Restaurant on Rt. 22
 
HARMARVILLE / PITTSBURGH
Wednesday, September 14, 2016
2:00PM
TownePlace Suites / Pittsburgh
2785 Freeport Road
Pittsburgh, PA 15238
Just off of Exit 48 of PA Turnpike
 
MONROEVILLE
Wednesday, September 14, 2016
7:00PM
The Estate Planning Centers
3824 Northern Pike, Suite 801B
One Monroeville Center
Monroeville, PA 15146
Just west of Red Lobster on Rt. 22
 
MURRYSVLLE / DELMONT
Saturday, September 17, 2016
10:00AM
Holiday Inn Express
Delmont/Murrysville
6552 Route 22
Delmont, PA 15626
Behind Lamplighter Restaurant
 

 
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Proudly serving clients throughout Allegheny, Westmoreland, Butler, Fayette, and Washington Counties; including Pittsburgh, Monroeville, Greensburg, Latrobe, Cranberry, Wexford, Sewickley and YOUR community.

Recent Tax Court Ruling Reminds Caution Required In Use of FLPs and ILITs For Estate Tax Reduction

For high net worth clients, the use of the Family Limited Partnership (FLP) vehicle to create a wealth transfer structure with reduced federal Estate Tax consequences grew in favor over the last 20 years. More recently, this vehicle has been under scrutiny, if not attack, by the IRS. In Turner Est. V. Comr. (TC Memo 2011-209; 8/30/2011), The Tax Court held that FLP assets were included in the taxable estate of the parent/General Partner, despite substantial gifting of Limited Partnership interests to family members, where the FLP had no legitimate non-tax business reasons for existence, and further because the parent/General Partner retained too much control over the FLP.  The use of an FLP is a sophisticated and powerful tool, but to obtain the benefits expected by a high net worth client, it must not only be structured correctly, but further then used correctly.
 
In Turner, Mother and Father created a FLP approximately two years before father’s death, funding it with approximately $8,000,000 in securities.  While it was purportedly created to increase the family’s wealth and provide a means to educate family members about management and preservation of the family’s assets, the FLP essentially remained under the sole control of Father as one of the General Partners.  No investment ‘strategy’ was employed, as most assets were simply held in long positions. Some real estate investments were pursued, including development, but the Court found that Father simply let the FLP take advantage of opportunities which came his way. Father was paid distributions without regard to the level of input he provided, purchased assets for the FLP without respecting the formal FLP structures, and retained the ability to modify the FLP agreement and distributions.
 
The court found that the FLP assets Father transferred to the FLP were nonetheless fully includable in his estate upon his death, despite the transfer of nearly one-half of the partnership interests to his children.
 
The lessons to be taken from this decision include:
 

1. FLP’s must be carefully structured and considered, and not be based on cut-and-paste forms;

2. FLP’s, like other legal entities, cannot be treated as personal piggy-banks by those involved, and instead the formalities and structures must be respected so as not to jeopardize the very reason they were first implemented; and

3. Clients seeking to escape the burden of estate tax using sophisticated wealth transfer strategies must be willing to accept some of the required limitations, including some release of control and enjoyment of the assets.

 
On a positive note, a minor holding in this case was that Father’s failure to appropriately use his Irrevocable Life Insurance Trust funding strategies was not fatal.  Father’s ILIT included standard Crummey powers, giving the beneficiaries of his insurance trust the right to withdraw the amounts deposited to pay the life insurance premiums for 30 days after those amounts were placed in the trust and notice given to the beneficiaries. This structure is required in order to permit Father’s gift of the policy premium to the trust to satisfy the ‘present interest’ requirement of the annual Gift Tax exclusion amount (currently $13,000).  In Turner, Father failed to give notice to the beneficiaries of the gifts to the trust, and further paid the premium amounts directly to the insurer, rather than first depositing the amount required in the accounts titled to the trust.  The IRS frequently views such procedural failings as fatal to the annual Gift Tax exemption, however the Tax Court opinions can be more relaxed in that regard under applicable precedent. Thus, the ILIT’s tax-saving purpose was not destroyed despite the parents’ failure to respect its structure. Notably, however, Father’s estate had to litigate this matter with the IRS and pursue the appeal to the Tax Court before winning on this point.  The stress, expense and risk of this litigation could have been avoided with a minor amount of attention to the ILIT formalities during Father’s lifetime.
 
Please continue to raise the issue of adherence to formalities of legal structures during consultations with your clients employing such tools, and encourage them to seek counsel when you hear of uncertainty or laxity in their actions.