The United States Tax Court recently held, in the case of the Estate of Reichardt, 114 TC No. 9 (2000), that property transferred by an individual to a family limited partnership (“FLP”) was includible in the decedent’s gross estate because the decedent retained possession and enjoyment of the property, including the right to its income.
Shortly after having diagnosed with terminal cancer, Mr. Reichardt formed a revocable living trust and a FLP. He appointed himself and his children as Co-Trustees to act on behalf of the trust. The trust was the FLP’s only general partner.
In the case, Mr. Reichardt transferred all of his property (except for his car, personal effects, and a small amount of cash) to the FLP, including property in which he had a life interest. He signed deeds individually and on behalf of his wife’s estate, transferring property to his living trust. He then signed deeds as trustee, transferring the property of the FLP, Reichardt then gave each of his children a 30.4% interest in the FLP on October 22, 1993. He died on August 21, 1994 and his estate did not report any of the assets transferred to the trust and FLP. The Internal Revenue Service determined that the assets transferred to FLP should have been included in the Reichardt estate.
There are several lessons to be learned from the Reichardt case. First, it is paramount to have a proper business purpose for an FLP. An FLP has a proper business purpose when it is funded with income-producing assets, not merely a personal residence or cash and securities.
Second, an FLP is a separate business entity, and therefore requires certain records in order to be respected as a business form. In audits with the Internal Revenue Service the taxpayer may be required to produce, among other things, accounting records, bank and brokerage account records, tax returns and charter documents to establish the separate business nature of the FLP.
Third, in order to ensure that property transferred to an FLP will be brought back into the transferor’s estate under Internal Revenue Code Sec. 2036, the transferor must respect the FLP business form. The transferor should avoid using FLP property personally, and should never commingle it with his or her own property.