How to Avoid the Attention of the IRS When Making Family Limited Partnership Gifts

May 04, 2017

The formation and transfer of assets to a Family Limited Partnership (FLP) or Limited Liability Company (LLC) can provide multiple benefits for individuals and families including asset protection, dispute resolution and favorable tax benefits for gifting. Typically, each state has its own form of a Uniform Limited Partnership Act or Limited Liability Act that allows for the formation of partnerships and LLCs that can hold real estate, marketable securities and other assets. The management of the assets can be controlled by a general partner or managing member while the remaining interests can be transferred to other family members.  These transfers of noncontrolling interests can benefit from lower taxation due to discounts for lack of control and lack of marketability. However, many FLPs and LLCs used for gifting receive special scrutiny by the Internal Revenue Service (IRS). In fact, certain IRS officials have stated (off the record) that every FLP will be examined. The primary reason that they are unpopular with the IRS is due to the tax benefits received by the donor that lower revenue to the Department of Treasury.

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