The use of family limited partnerships can be an effective estate tax planning technique if done properly. As a result, the IRS has an aversion to these entities and will seek to attack them whenever possible. The Service has been relying on a section of the Internal Revenue Code which causes inclusion of assets in an estate if, among things, a decedent has made a transfer without receiving adequate consideration and also has retained various rights over the asset transferred.
In the Estate of C.W. Turner the decedent created a family limited partnership, however there were problems with its creation and funding. The decedent also commingled personal and partnership funds, used partnership funds to pay personal expenses, received disproportionate partnership distributions and a management fee and could unilaterally amend the partnership agreement.
Based on this fact pattern, it is not surprising that the United States Tax Court held the assets of the partnership that were included in the decedent's taxable estate.
In creating and managing a family limited partnership it is imperative that all required steps be done correctly. If you already have a family limited partnership you should consult regularly with you tax advisor to assure that there are no missteps.