Another Piece of the Family Limited Partnership Puzzle

Posted By: Manish C. Bhatia

The Indiana District Court has provided another nugget of guidance regarding the organization and operation of a Family Limited Partnership (FLP).

In John W. Fisher and Janice B. Fisher v. United States of America (March 11, 2010), the court held that the FLP interests gifted by the Fishers to their children and grandchildren were transfers of future interests in property and, therefore, not subject to the gift tax exclusion under §2503(b)(1).  The determining factor in the case was the IRS argument that the children could not unilaterally transfer the gifted interests and, therefore, had no present interest in the gifts.  Under the operating agreement, the FLP had a right of first refusal, which the court said effectively prevents the children from transferring their interests in exchange for immediate value, unless the transfer is to a Fisher descendant.

This is another valuable piece of the FLP puzzle.  If you own or operate an FLP, make sure that you or your client will not be caught in this trap.