Family Limited Partnerships: The Year in Review

In November 2005, one of the authors co-authored an article for The Florida Bar Journal regarding family limited partnerships (FLPs), which focused on the most recent family limited partnership cases in the context of the bona fide sale exception to [section]2036 of the Internal Revenue Code of 1986, as amended. (1) About one year later, he co-authored a follow-up article for The Florida Bar Journal discussing FLP cases decided after the publication of the first article. (2) Since the publication of the follow-up article, there have been three [section]2036 cases involving FLPs (3)--the IRS was victorious in all of these cases. Each of these cases contains an abundance of "bad facts" (e.g., majority of assets transferred to the partnership, use of partnership funds for the transferor's personal expenses, the transferor is terminally ill or in very poor health upon formation, etc.). The purpose of this article is to discuss these recent "bad fact" cases, Estate of Erickson v. Commissioner, T.C. Memo 2007-107; Estate of Gore v. Commissioner, T.C. Memo 2007-169; and Estate of Bigelow v. Commissioner, 100 AFTR 2d 2007-6016 (9th Cir. 2007), aff'd, T.C. Memo 2005-65, which continue to provide a roadmap for practitioners and clients regarding how not to structure and operate an FLP. The article then discusses the results of a Minnesota state court case in which the court held that a trustee did not have a fiduciary duty to establish an FLP. (4) Florida courts have not yet considered the issue, but it is hard to imagine that they would come to a different conclusion--although, anything is possible. Lastly, the article discusses recent changes to the Federal Estate Tax Return, Form 706, with respect to the reporting of valuation discounts and entity interests.