In our business we have several concepts that utilize Family Limited Partnership’s (FLP’s) as part of an overall tax reduction strategy. The IRS often examines FLP’s to ensure that they are not merely tax avoidance schemes. But that doesn’t mean you should dismiss the idea. To minimize the likelihood of an IRS audit, our planners recommend the following precautions:

• The FLP should be treated like a legitimate partnership. Hold regular meetings with the other partners to discuss management issues.
• Have the partnership agreement drafted by an outside source. This is a good idea to avoid potential abuses by the general partner.
• Administer the FLP properly.  Set up a bank account that makes distributions in accordance with the partnership agreement, not just for personal convenience.
• Don’t go overboard. The IRS is likely to become suspicious if all, or virtually all, of your assets are transferred to the FLP. Don’t transfer personal assets such as your home and leave yourself plenty of money to live on.

Remember – the more the FLP looks and acts like a legitimate business partnership, the better the chances of surviving an IRS challenge.