Court Limits Use of Family Partnerships

New York Times

The US Court of Appeals for the FifthCircuit has clarified the use of family limitedpartnerships. A widespread techniqueestate planners use to reduce taxes oninheritances and gifts, a family limitedpartnership protects assets, including realestate and securities, and keeps them inthe family by removing a significantamount of assets from an estate whileallowing parents to retain control.According to the , thefamily of Texan Albert Strangi claimed toowe taxes on $6.6 million of his estate followinghis death in 1994, which conflictedwith the IRS'claim of $11 million, theamount of the entire partnership. The courtfound that Strangi's family limited partnershipfaltered in the following areas:Because he lived in it, Strangi's housecould be taxed as an inheritance, eventhough it was part of the partnership. Also,98% of his assets were put into the partnership—money that was used to pay offhis debts. To avoid the pitfalls of theStrangi case, physicians should utilize partnershipsto limit liability rather than avoidtaxes. If you would like to pass your estateto your children, do not allocate all of yourassets into a family limited partnership,because payouts to parents can potentiallydisqualify partnerships from avoidingestate taxes.