Assets are valued for gift and estate tax purposes at their fair market value – what a willing buyer would pay a willing seller for those assets. FLPs typically have restrictions on their transferability. For example, transfers to non-family members may be prohibited unless other family members agree. Also, there may be a smaller number of persons interested in buying limited partnership interests than there would be for the underlying assets. These factors – restrictions on transferability and lack of marketability, among others – can make the price a willing buyer would pay for an FLP interest less than what the same type of buyer would pay for the underlying assets. This difference – the discount – can reduce the amount of gift and estate taxes payable. Discounts can range from nothing to 50% or more, depending upon many factors, including the terms of the partnership agreement, the type of partnership assets, the ownership percentages of the various partnership and how the partnership is operated. The Internal Revenue Service does not like that FLPs often receive discounts for estate and gift tax purposes, and it has several ways to attack discounts. Because of this, no family should assume that discounts will be available for their FLP. There should be reasons other than possible discounts for creating the FLP.

Last updated on January 6, 2011 by Glenn Karisch