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April 8, 2014

Valuation of Family Limited Partnerships

One common procedure when gifting interests in a Family Limited Partnership (FLP) is to have a valuation performed.  Limited Partners are prohibited from participating in daily operations, never have control over any of the property, and many times are restricted from sale of their interest.  Both the IRS and tax courts have recognized that due to the Limited Partners lack of control and lack of marketability of their interest, the Limited Partner interest is considered worth less than that of the General Partners.  For this reason, a valuation is performed to discount the fair market value.  The valuation discount will reduce the value of a Limited Partner’s interest for gift tax purposes.  By utilizing the valuation discount, the taxpayer can effectively gift additional limited partner interest.  Since FLP’s are a popular technique for reducing estate and gift taxes, they are being targeted by the IRS.  One common area challenged by the IRS is the reason for formation.  For this reason, a valid non-tax reason must be present to form a Family Limited Partnership.

Contact your Anders advisor to determine if a FLP is right for you.

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