Estate Planning . . .  ALERT:

The information contained in this ALERT is not intended to constitute legal, or financial advice.  Decisions with regard to legal and/or financial matters should only be made after consultation with a competent professional.

Because of the huge revenue potential to the government, the IRS often targets large estates for audit and aggressive treatment.  Although the statistical likelihood of any federal tax return becoming the subject of an audit is at historic lows, large estates that the IRS thinks may generate significant additional revenue via an audit are a clear exception to this rule. 

Therefore, it is so important that things be done “right” in the formulation and execution of your estate plan.  Although they have lost a bit of their luster in recent years, Family Limited Partnerships have been a useful estate-planning tool, but if implemented improperly, the results are often disastrous.  The detailed machinations of a Family Limited Partnership is beyond the scope of this ALERT, but basically, the vehicle can reduce the size of an estate by placing assets into a limited partnership.  The existence of the partnership ownership decreases what was the value of the asset(s) in the hands of the transferor, because the family limited partnership fractionalizes the ownership among other individuals (members of the transferor’s family), and subjects the control of the asset(s) to the dictates of the partnership.  These aspects establish discounts to the value of the asset(s) before the partnership was implemented.

One of the most fundamental principles underscoring much of the Internal Revenue Code is the so-called economic reality test.  Stated another way, business transactions need to be arranged to reflect business, economic and legal reality.  Business transactions not reflecting economic reality, or organized solely to take advantage of a quirk in the law, may not be recognized for tax purposes.  What has happened too frequently in the estate-planning world where Family Limited partnerships are involved is that the partnership is organized, but never transacts business.  Or the partnership is formed to hold and control real estate, for example, but the deeds of conveyance into the partnership are never signed or recorded until the transferor is on her deathbed.  The IRS will argue that these partnerships never had a valid business purpose and were formed for no reason other than to try to gain a reduction in the size of the decedent’s estate. 

The IRS has been very successful in contesting estate values with this approach, so be careful.  As with many planning techniques, for the Family Limited Partnership to be effective every “t” must be crossed and every “i” dotted.

Make sure your punctuation is in order!

The hiring of a lawyer is an important decision that should not be based solely upon advertising.  Please visit the Doherty Professional Association at www.dohertypa.com today to learn about Mr. Doherty’s credentials and how he might assist you in estate and financial matters.