Family FLP/FLLC Checklist – Make Sure You do it Right
Family Limited Partnerships, or more commonly now, Family Limited Liability Companies, are great vehicles for management and protection of family businesses, real estate, and investments. They also can be used to facilitate gifting, since interests in the entity given to junior family members typically qualify for minority interest and lack of marketability discounts. These discounts can provide powerful leveraging.
However, to stand up to IRS scrutiny, it is important the FLP or FLLC be properly formed and administered. Click “Continue Reading” for a checklist to help determine if your family entity meets the necessary criteria.
1. Were timely and properly filed papers filed to set up an FLP under appropriate state law?
2. Has the planning team carefully documented the significant non-tax benefits to the client to justify the creation and maintenance of FLP? (i.e., Are there demonstrable bona fide business/investment purposes in both the formation and operation and is there economic substance to the entity?)
3. Have we obtained the appraisal of a full time accredited, independent, and experienced (preferably court-tested) valuation professional who created a studiously crafted individual report (rather than a “fill in blanks” quickie) based on the specific FLP’s facts? (And were realistic and justifiable assumptions used in developing the valuation discounts – and did the expert document the reasons for the types and amounts of discounts?)
4. Have we avoided co-mingling of funds and continued treatment by the client of money in the FLP as “his/her own money”?
5. Have we made sure that there has in fact been a significant change in the administration and management of the client’s assets – and can prove that there was much more than merely a name change and a different wrapper around the assets?
6. Have we supervised the transfer of assets to the FLP account in a timely and business-like manner?
7. Did we hold and keep passive or personal assets that are not appropriate to a business or investment enterprise out of the FLP?
8. Did we set up the FLP while our client was young/healthy/competent (or was the entity formed by a very old and very ill person – on or practically on his/her deathbed or was our client incompetent at the time we set up the FLP?)
9. Did our client retain sufficient assets to maintain his/her standard of living without the need to rely on FLP assets (or did our client place all or essentially all of his/her assets into FLP leaving no visible and adequate means of support other than the FLP’s assets)?
10. Were we careful to advise parties in writing that they could have no expectation or understanding that – directly or indirectly – status prior to creation of FLP would remain (i.e. “It’s still Pop’s money” or “All of this will continue to be available to pay Mom’s bills and meet her financial needs and expenses”? Did Dad always get what he asked for or what he wanted or needed from the FLP? Did Mom expect that her children would provide support for her – through the FLP? Were Mom’s and Pop’s taxes (income or estate) and related expenses paid by the FLP?
11. Were we careful to place only business or investment assets into FLP and keep personal assets – such as the family home (particularly our client’s personal residence) out of the FLP? Did we insist our client had to either leave a residence that he/she placed into FLP or actually pay the entity (not accrue) a fair and arms’ length rent? Has the client actually paid rent in a timely manner? Have we retained documentation?
12. Does this FLP really represent more than a mere change in title and more than a recycling of value? What have we done to prove it?
13. Did the FLP initially – and does it continue – to meet the appropriate state’s definition of an FLP?
14. Are general partners really and actively involved in business?
15. Have we actually changed investment strategy – after securities were contributed?
16. Did our client give up the right to replace or remove the general partner?
17. Did our client (and his/her spouse) give up the right (directly or indirectly) unilaterally to decide when, how much, and to whom distributions from FLP would go?
18. Does the FLP conduct formal meetings and observe business formalities?
19. Are there meaningful negotiations and bargaining between the general partners?
20. Do adult children actively represent their own interests – or did they do just what Mom and Pop tell them to do?
21. Did we get our “timing” right? Have we made sure that our capital contribution was first credited to the senior member’s (parent’s) capital account and then, a discrete time later, followed by a gift of the partnership interest to the children?