We may have seen the demise of family limited partnerships (FLPs) with the decision of the Tax Court in Estate of Mirowski, TC Memo 2008-74 (March 28, 2008). The taxpayer funded a new LLC with $63 million of mostly marketable securities and immediately gifted 16% interests in the LLC to her three children, leaving her with 52% and the manager of the LLC. A short time later she died. The Tax Court held that the assets transferred to the LLC were not includable in her gross estate under IRC 2036(a) and applied a 40% discount to her interest in the LLC.
This case is important for LLCs for two reasons. First, is the recognition by the Tax Court that involving the family in the management of the LLC's investments is a sufficient non-tax reason for forming the LLC (thus meeting one of the tests to qualify for the 2036(a) exception). But most intriguing is the Tax Court's response to the IRS argument that the assets should be included in her estate because she was the sole, exclusive manager of the LLC with the right to control distributions from the LLC. The Tax Court rejected this reasoning because it believed the fiduciary duties imposed on the taxpayer as manager of the LLC under the Maryland LLC Act together with the obligation contained in the operating agreement to distribute the LLC profits annually limited her discretion as manager. This is a long way from being a limited partner with no ability to manage or control the operation of the limited partnership. On the strength of Mirowski is there any reason to use family limited partnerships for estate planning purposes anymore?
For a recent perspective on the use of FLPs see Joe Kristan's Tax Update Blog.
For more information about estate planning contact my colleague, David Repp
-Marc Ward
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