Family Limited Partnership Distribution Control: Retained Rights or Estate Inclusion?

High

—

🏢 Client

We closed the Morrison Family Limited Partnership last month—three commercial properties, total equity around $17.5 million. I contributed everything at formation, then immediately turned around and gifted out half the LP interests to my wife Eleanor and our three kids. We used a 35% combined discount—25% for lack of marketability, 15% for lack of control—so we're reporting about $5.7 million in t…

🔒

Create a free account to keep reading.

It takes 10 seconds.

Create free account Already have one? Sign in

Free accounts get unlimited access to all conversations.

Discussion

No comments yet. Be the first.

Case Summary ▾

Complexity ⓘ High

Fact Pattern Taxpayer formed family limited partnership holding three commercial properties ($17.5M equity), immediately gifted 50% of LP interests to spouse and children using 35% combined discount (25% DLOM, 15% DLOC), while retaining 49% LP interest and 50% ownership of GP entity with full distribution authority. Spouse co-owns GP but has documented early-stage dementia.

Position Taken Structure vulnerable to Section 2036(a)(2) estate inclusion due to retained GP control over distributions through Morrison Management LLC, particularly given spouse's diminished capacity creating de facto sole control. Maintain current structure without post-formation amendments that evidence consciousness of defect. Create contemporaneous written records of all GP decisions showing partnership-level deliberation. Ensure strictly pro rata distributions with no self-dealing. 35% combined discount is aggressive but defensible if appraisal methodology supports 25% DLOM with quantifiable factors beyond generic illiquidity. Audit probability 30-40% on gift return; Section 2036 challenge likely on estate examination if distribution patterns or GP succession demonstrate retained control.

IRS Challenge Section 2036(a)(2) inclusion of full date-of-death value of gifted LP interests based on retained distribution authority through GP entity that taxpayer effectively controls alone due to spouse's incapacity, combined with lack of meaningful non-tax business purpose where fully operational properties required no partnership structure for continued management. Estate of Strangi analysis: GP discretion over non-tax distributions constitutes retained right to designate who enjoys partnership income even with mandatory tax distribution provisions. Post-formation concerns about spouse capacity and GP succession evidence awareness of retained sole control at transfer.

Authorities

IRC § 2036(a)(2) IRC § 2001(b) IRC § 6662(a) Treas. Reg. § 20.2036-1(b)(3) Estate of Strangi v. Commissioner, 293 F.3d 279 (5th Cir. 2002)