Case Histories
The Family Limited Partnerships require expertise to work properly.
A Family Limited Partnership (FLP) can be a useful vehicle, especially for those in occupations particularly prone to lawsuits. Doctors, small business owners, successful executives and affluent retirees are in that category. Family Limited Partnerships can also be useful for those who own rental properties.There are two main advantages to a FLP (pronounced ‘flip’). First, it provides a liability shield that protects the assets owned by it from the claims of creditors. Secondly, ownership of the Partnership can be transferred to other family members at a discount to fair market value providing numerous estate planning benefits.
It is vital that any advanced planning vehicle be set up and maintained according to strict guidelines. Done incorrectly, an advanced planning vehicle can be nullified by the IRS resulting in additional taxes.
For instance, many of my clients who are physicians utilize FLPs. One particular client, we’ll refer to them as the Smith’s, used the services of a local attorney to set up their FLP. Over time they became overwhelmed trying to manage their affairs and turned to Legacy Planning Group, Inc. for help.
We go through our client’s situations with a fine-tooth comb to uncover the little details that can easily fall through the cracks. Often, it’s these details that could result in our client unnecessarily losing hundreds of thousands of dollars. That was the case with the Smith’s.
The FLP had been set up correctly. Ownership of their rental real estate had properly been transferred to the FLP. Unfortunately, the client failed to realize that the FLP required its own tax return, so no tax returns had been filed for 5 years. Worse, leases weren’t set up between the FLP and the tenants. Either of these actions could have resulted in the IRS nullifying the partnership.
The ramifications didn’t end there. Mr. Smith, as most physicians recognize will eventually happen to them, was sued for malpractice during that five-year period. The main reason for establishing the FLP in the first place was to protect their assets from lawsuits. Since tax returns weren’t filed and leases weren’t set up, a court could have rendered the FLP non-existent and the assets exposed. Imagine the Smith’s concern.
Thankfully, the malpractice suit was defeated. At Legacy Planning Group, Inc., we completed five years of balance sheets and income statements and worked with their CPA to get tax returns filed for the previous 5 years. We are working to minimize IRS penalties. We’ve helped the Smith’s set up leases and checking accounts.
Moving forward, they now are comfortable that they have someone that watches over their needs and their financial interests.
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