Many clients have formed family limited partnerships (FLP) for a variety of reasons, including the desire to centralize the management of various assets for multiple family members, asset protection benefits, state and local tax benefits, and transitioning asset management to future generations. Some senior members of the families might also make gifts or sales of limited partnership interests to trusts for younger generations. Such gifts and sales are often at discounted values (from the value of the underlying assets) because limited partnership interests, by definition, have a lack of control and are not readily marketable.

There is a growing body of case law where the IRS has challanged both the amount of the discounts claimed by taxpayers, as well as the ability to claim discounts at all. But one thing is certain - you can only ask the IRS to recognize the validity of the FLP planning if you are willing to maintain the formalities of ownership. What does that mean? At a mimimum, it should mean the following:

 

 

 If you have any questions about maintaining your FLP, please do not hesitate to contact us.

 

 

As noted earlier, IRS-published interest rates can be used for a variety of estate planning purposes, including the sale of interests in family limited partnerships to specific types of trusts known as "grantor" trusts. Such sales generally are made in exchange for a promissory note, with the interest rate based on the U.S. Treasury's published tables. For example, a note executed in January 2005 having a term of more than 3 years and less than 9 years may have called for an annual interest rate of 3.76%. That same note, if executed and delivered in October 2010 would only bear interest at 1.73%. The lower the interest rate, the better, because it means that more of the return on the investment by the Grantor Trust will be preserved for future generations, rather than being paid to the seller (and ultimately adding to the estate tax liability). So now might be the perfect time to consider refinancing the interest rate on older notes to take advantage of the lower rates.

Most notes are prepayable without penalty, and therefore there shouldn't be much problem with simply executing a new note in exchange for the old note or modifying the old note with a letter agreement.  There is no precedent in this area, and many practitioners recommend that there be some consideration for the renegotiation to a lower rate, such as a prepayment of principal on the note. We are happy to discuss the tax saving opportunities from a refinancing.