Tax
Court Reaffirms Family Limited Partnership
Planning Tool
Written
By: Attorney
Jeffrey A. Marshall
, CELA*
The
United States Tax Court has issued a decision that discusses the use of
minority and marketability discounts in Family Limited Partnerships.
The decision reaffirms the use of this planning tool to achieve
significant tax savings.
Family Limited Partnerships are a sophisticated
planning tool that, in the right circumstances, can help clients achieve
their estate planning goals. Limiting
death tax costs is frequently an important client goal.
One of the key ways to achieve tax savings is for a client to give
away assets during his or her lifetime to ensure they will not be included
in the client’s estate at death. However,
there are tax limitations on how much a parent or other individual can
give to children or others and the donor generally loses control over
donated property once a gift is made.
The Family Limited Partnership helps solve these problems by
providing a way for a senior family member to make completed gifts to
children or grandchildren at reduced values, while retaining operating
control over the donated assets.
A Family Limited Partnership is a limited partnership
where all of the partners are family members or family trusts.
With a limited partnership, the “general partner(s)” have
pretty much complete control over the management of the partnership and
its assets. The “limited
partners” are basically passive investors who have no say over the
day-to-day management of the affairs of the partnership.
This means that a family limited partnership with a parent as a 1%
general partner and children as the 99% limited partners effectively gives
the parent complete control of the partnership and its assets, even though
the parent owns only 1% of the partnership.
The partnership form also helps protect the gifted
assets from a child’s bad marriage or other creditor or liability
problems. And, as a big
bonus, Family Limited Partnerships can also be used to achieve significant
gift tax and/or death tax savings. The
recently reported Tax Court case of Lappo v. Commissioner of Internal
Revenue (decided on
September 3, 2003
) shows how this device is used to save gift and estate taxes.
Clarrisa Lappo owned over $1.3 million in marketable
securities in addition to real estate worth over $1.8 million.
She wanted to remove these assets from her taxable estate.
To do so, Clarissa and her daughter Clarajane formed the Lappo
Family Limited Partnership. Initially,
Clarissa owned 99.7% of the partnership interests.
She then transferred ownership of her marketable securities and
real estate to the partnership. Then
Clarissa gave almost all of her interests in the partnership away to
Clarajane and her children; but Clarissa kept a 1% general partnership
interest for herself so that she remained the controlling general partner.
Although the assets which Clarissa conveyed to the
partnership were worth over $3.1 million, and Clarissa gave 99% of the
partnership interests away, she filed a gift tax return that claimed that
the value of her gifts of partnership interests to her daughter and
grandchildren was only $1.5 million.
Clarissa claimed that this reduction in value was appropriate
because of minority interest and marketability discounts that apply to
limited partnerships.
Clarissa was claiming that the value of her interest
in the partnership was worth a lot less than the real estate and
securities were worth when she owned them outright the day before.
This “discount” was a result of the fact that her interests in
the partnership were not readily transferable (“marketable”) and were
classified as a “minority” interest.
In effect, Clarissa was arguing that a reasonable buyer would not
be willing to pay full value (based on the value of the assets owned by
the partnership) for a non-controlling interest in a business entity that
carries a number of restrictions, and that cannot be readily re-sold.
The IRS frequently contests cases involving what it
perceives as overly aggressive discounting of limited partnership
interests. But, the Tax Court
has upheld the concept of discounts and as a result, the IRS has been
forced to accept it. Recently,
the IRS has been accepting 25% discounts as being reasonable where
marketable securities or cash are involved, 25-40% discounts with real
estate, and even higher discounts where an active business is involved.
In Clarissa’s case, it agreed that minority and marketability
discounts should be applied to her interests in the Lappo Family Limited
Partnership, but it disputed the amount of Clarissa’s claimed discount
of approximately 50%.
After hearing the testimony of various experts, the
court concluded that the value of Clarissa’s interest in the partnership
was worth less than the value of her interest in the assets when she owned
them outright, but not by 50%. It
applied a combination of minority and marketability discounts that totaled
approximately 35.4% in determining the value of the gifts of the
partnership interests she made. Although
the 35.4% was somewhat less than the discount Clarissa had originally
claimed, it still provided her with significant tax savings.
Clarissa was able to reduce the taxable value of her gifts by 35.4%
(over a million dollar reduction) by using the family limited partnership.
And, she retained control.
Of course, Family Limited
Partnerships involve some disadvantages as well as benefits.
The disadvantages include the cost of establishing and maintaining
the entity. This is complicated work, and legal fees can be expensive.
There may also be appraisal costs involved in establishing the
values of the assets and costs for preparing the annual income tax returns
that will be required for the partnership.
Pennsylvania
also levies a realty transfer tax that can apply to real estate placed in
a Family Limited Partnership, although there are exceptions to this tax,
including one for family farms.
Like most estate planning tools, this planning
vehicle may make a lot of sense depending upon the particular situation.
This recent case, Lappo v.
Commissioner of Internal Revenue, T.C. Memo 2003-258, is just further
evidence of how effective it can be.
The case is available on the internet at http://www.ustaxcourt.gov/InOpHistoric/Lappo2.TCM.WPD.pdf.
Largest
Assisted Living Company Changes Focus
Written
By: Attorney
Jeffrey A. Marshall
, CELA*
The
New York Times reports that Sunrise Senior Living, the biggest player in
the Assisted Living industry, is in the process of selling most of its
properties and becoming primarily a management company.
The Assisted Living industry has recently gone
through several difficult years. In
the late 1990s, the industry over-estimated demand and built too many new
units. It turns out that
people would rather stay in their homes as long as possible rather than
moving to assisted living. Also,
financial help may be more available to the senior who chooses to stay at
home rather than moving to a formal personal care setting.
For example, in
Pennsylvania
, programs like the PDA 60+ Waiver, the Bridge, and Options all provide
assistance to individuals living at home, but not in Assisted Living
Facilities (ALFs).
Occupancy levels in ALFs have dropped from 86 percent
to 83 percent, and construction has slowed from more than 32,700 new
apartments in 1998 to only 3,600 in 2002.
The average move-in age of an ALF resident is 83, older than
anticipated. The median rent
nationwide is $2,200 a month, more than many seniors can afford.
In response to these trends,
Sunrise
has decided to change its business model from that of owning ALF
properties, to that of operating facilities for real estate ventures.
Recently,
Sunrise
sold 23 of its properties to Crescent Capital Investments, a subsidiary of
the First Islamic Investment Bank of
Bahrain
. As part of the sale
agreement,
Sunrise
will manage the properties and retain a 10% interest.
Another recent sale of $300 million in properties was to the
California Public Employee’s Retirement System.
By 2005,
Sunrise
expects to have divested itself of nearly all of its real estate.
These sales should reduce
Sunrise
’s risk, but also its potential reward.
Other companies in the industry may attempt to follow
Sunrise
’s lead. 90% of assisted living properties in the
US
are owned by for-profit companies.
The New York Times article is Assisted Living
Company Shifts Strategy, The New York Times
July 30, 2003
.
Sunrise
’s website is located at: http://www.sunriseseniorliving.com.
An industry trade organization, the American Seniors
Housing Association is online at: http://www.seniorshousing.org.
More information on government financing of home care
programs for seniors is available on the Elder Law Firm of Marshall &
Associates website at: http://www.paelderlaw.com/articles.html
“Using
Medicaid to Pay for Home and Nursing Facility Care”
Below
you will find a list of some of the seminars that we will be presenting
throughout Northeastern and
Central Pennsylvania
over the next few months. Lifetime planning and problems related to long
term care are increasingly important issues for seniors. Four out of every
ten people reaching age 65 will spend some time in a nursing home, and
many more will require home care and assistance with daily living.
The Elder Law Firm of
Marshall & Associates
is known throughout
Pennsylvania
for the expert help we provide seniors who are faced with long term care
needs. Often families struggle to care for their loved one at home for as
long as possible. We help these care-givers find ways to get the financial
help they need so that the highest quality care can be provided in the
most appropriate setting (at-home, assisted living, or nursing facility).
If nursing home placement becomes necessary, we work
with the facility to help make the transition go as smoothly as possible.
We make certain that the nursing facility gets paid in a timely manner
while teaching the family how they can pay nursing home costs without
losing their homes or going broke.
Join us for one
of these free seminars and learn what you need to know about how to get
the help you need and protect your family's financial security when your
spouse or parent is faced with a long term illness.
Each seminar is FREE
and open to seniors, their families, elder care professionals, and anyone
else who needs to learn more about this complex subject.
Each seminar lasts about 1 ½ hours, including a “Question &
Answer” Session.
-
Williamsport
:
Wednesday, October 15th at
6:30
PM
at
The Radisson
-
Wilkes-Barre
:
Saturday, October 25th at 10:00 AM at The Woodlands
Reservations
are suggested, but not required. SIGN
UP ONLINE or call 1-800-401-4552 for more information or to
reserve your spot for one of these free seminars!
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you know… past issues of the Elder Care Law Alert are available on our
website at:
www.paelderlaw.com/news.html
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*Attorney
Marshall
is certified as an
Elder Law Attorney by the National Elder Law Foundation under
authorization from the Pennsylvania Supreme Court
© 2000-2005
Marshall & Associates www.paelderlaw.com
