And now for an understatement: “Family Limited Partnerships Require Good Planning and Execution.” If you’re a fan of business law horror stories, then this recent article by Peter Reilly at Forbes and the case of Estate of Paul H. Liljestrand v. Commissioner should be both entertaining and instructive. The subject is the role of the Family Limited Partnership (FLP), an entity common to small business and estate law alike, and the problems that can be created. You’ll need to read the story for yourself, as well as Reilly’s asides, but the bottomline wisdom is that an FLP, like any other business entity, exists on at least three fronts. First, what you do with the partnership itself. Second, the accounting system of money going in and out of the FLP. Third, and of utmost importance, the FLP is a legal entity with various requirements of which real honesty is essential. To my ears, it sounds like the case above is a failure on all three fronts – it’s a mess – but Reilly identifies a disconnect between the accounting and the legal aspects to be the most fundamental downfall. In the end, the moral is to ensure you’re doing it right, or, as Reilly concludes: The moral of the story is that in order for the plan to work you must have coordination between the attorney who prepares the plan and the accountant who will be preparing the relevant returns. If you don’t want to trouble yourself with what entity should pay what bill or accept what deposit, etc., let that piece be handled by your professionals, also, but again in an integrated manner. There has to be somebody who cares what account is used, because that is their job. Check out the full story.
Reference: Forbes (November 12, 2011) “Family Limited Partnerships Require Good Planning and Execution”