FLPs are complicated structures, and we want you to implement your FLPs properly. Carelessness and failure to abide by formalities may lead to a creditor undoing, or the IRS challenging, many of the benefits of an FLP. Thus, we present this reminder to clients who have established FLPs.
Keep accurate records of transactions, investments, sales of property, etc. Keep these records separately from your personal records. Keep records of distributions from the FLP to the partners. The simplest repository of a partnership’s financial records is the partnership’s bank account check register. It is often most convenient to keep all records in the FLP binder.
Do not commingle FLP assets and other assets . Do not pay for personal expenses from the FLP accounts. If a creditor wants to pierce an FLP, and he can show that you used the FLP for personal expenses, then the creditor will have an easier time convincing a court that there is little distinction between FLP assets and your personal assets, subject to attachment. Respect the integrity of the FLP as a distinct entity, and use FLP accounts only for FLP, not personal, purposes. Consider all expenses not related to the FLP or its assets as personal.
Have annual meetings . Annual meetings need not be formal in form, and can occur over brunch or at Thanksgiving dinner.
Keep minutes of the annual meeting, and any other meeting . You don’t need a lawyer to record the minutes; keep a log in plain English of what was discussed, and what was decided by the partners. The minutes can be as simple as: “All partners attended. We discussed the tax return deadline.”
Annual gifting, and proper records and valuation of gifts . If you’ve set up the FLP for estate planning purposes, then follow through with that intent, and every year, gift limited partnership interests to your family members. This is one formality where you may want to consult with an attorney, to make sure the Memorandum of Gift and the valuation calculations and statements are correct. This is an area of particular IRS scrutiny, so properly documenting your annual gifts will go a long way in the event of an audit.
Keep periodic valuations of FLP property . You will need these valuations and appraisals for tax purposes, and as backup for valuation discounts of gifted FLP interests.
Annual renewal . Be on the lookout for the renewal notices sent by the Secretary of State. Don’t let the FLP lapse because you don’t pay the annual renewal fees.
Annual tax return . FLPs must file an IRS Form 1065 each year, generally by April 15th. This is an informational return, listing the partners and their share of FLP income. FLPs must also issue Forms K-1s to all of the partners, which show the partners’ share of income; the income is then included on the individual partner’s 1040 income tax return. You should consult with your accountant on preparation of these forms.