Among the drawbacks are: (1) Organizational costs -- Setting up an FLP typically costs $5,000 or more, so the potential advantages need to outweigh this upfront cost. (2) Operating requirements – The FLP must be operated as a separate business, with separate bank and investment accounts and separate tax returns (the tax effects flow through to the partners, but a separate tax return is required). The FLP form must be respected, which will mean changes from prior family practices. Personal finances and partnership finances must be kept separate. Many persons aren’t willing to make these changes, and FLPs are not for these people. (3) Tax scrutiny – The IRS scrutinizes FLPs for estate and gift tax purposes because it does not like the discounts many FLPs receive. Families should be prepared for this type of scrutiny when gift and estate tax returns are filed.

Last updated on January 6, 2011 by Glenn Karisch