This means that the younger family members stand to earn a higher rate of return on their limited partnership interests than if higher-cost outside financing had been used. As if all this is not enough, Parents have also made a gift of the value of certain limited partnership interests to younger family members, an action which carries significant, and beneficial, implications for estate and gift taxes. So much so, in fact, that the factual and legal issues pertinent to the valuation of the gifted FLP interests are crucial in determining the right set of circumstances to implement an FLP structure. The Key to Proper Use of the FLP One of the interesting quirks about holding an interest as a limited partner in an FLP is that the fair market value of the partnership's assets can be significantly larger than the value of the limited partner's proportionate share in those assets. Although challenged by the IRS, the valuation of discounts in a bona fide case have been consistently upheld by the courts.
Every case is different.
Consequently, family members making gifts of partnership interests should obtain a valuation study to document the value of the gift. One of President Clinton's 1999 tax proposals, if enacted into law, would prevent the taking of any discounts in such a case. The 1998 version of this proposal was criticized by congressional staff because of the broad and ambiguous manner in which the proposal was drafted. As a result, we advise that, until the issue is clarified, the use of valuation discounts for marketable assets in an FLP structure should be carefully considered. The first involves the definition of the rights and limitations of the general partnership interests retained by the older generation and those of the limited partnership interests that are gifted to the younger generation.