Bob Parrish CPA PC - Consulting OnLine

WHAT IS IT?

A family partnership is a partnership that exists between members of a family (defined for income tax purposes as including only an individual's spouse, ancestors, lineal descendants. and any trusts established primarily for the benefit of such persons).' If a partnership among family members is a genuine partnership, it will be treated tax wise the same as any other partnership and the same rules will apply.

The family partnership is a technique frequently used as a means of shifting the income tax burden from parents to children or other family members. However, the benefit of income shifting to children under age 14 has been substantially eliminated. For children underage 14, unearned income in excess of $1,200 (as indexed for 1994) generally will be taxed at the parent's top marginal rate under the "Kiddie Tax" rules.

Although family partnerships have sometimes been at tacked by the IRS as being mere tax avoidance schemes that should not be recognized for tax purposes, if the rules for establishing and operating such partnerships are carefully followed the IRS will recognize the validity of this income shifting device.²

Two major forms of family partnerships commonly used are the general partnership and the limited partnership.

The general partnership is an entity under which all partners have a voice in management (by percentage vote) but are personally liable for all of the debts and other liabilities of the general partnership. This very negative aspect often makes the general partnership entity unsuitable for family wealth preservation and has prompted the use of the limited partnership for the majority of family activities for which a partnership is appropriate.

One benefit of a general partnership is that, in some circumstances, the partners may share in the losses generated by the partnership for income tax purposes. This is made more difficult for limited partners due to the relatively recent passage of various "anti-tax shelter" laws which restrict the sharing of losses among partners in limited partnerships.

ships are so named because ownership of partnership interests typically is limited to members of the same family unit. Since the limited partnership form is most frequently used for the majority of family activities, this chapter will deal mainly with that form of doing business or holding assets.

Ownership rights in the FLP are governed by state law as modified by the H.P agreement. Most states have adopted the Uniform Limited Partnership Act (ULPA) or some modified version thereof. Although there may be slight differences in the statutory partnership rules from one state to another, there generally is a high degree of uniformity among the states.

Upon formation, family members contribute property in return for an ownership interest in the capita] and profits of the FLP. The partners designate a general partner (or general partners) who will be given management responsibility and who will assume personal liability for debts and other liabilities which are not satisfied from the assets of the FLP. Conversely, in return forgiving up the rights of management and control over the assets of the H.P. the personal liability of the limited partners generally is limited to the amount of capital which they contribute.

Although an under lying purpose of most FLP's is to manage family assets and to plan for the transfer of such assets from parents to children, many parents are not willing to part with control over their assets when the FLP is created. In some cases the parents simply desire to continue managing their property and in other cases the children lack the maturity or business skills required to manage the assets. Inthelattercase, an ELP usually provides the parents with the time and opportunity to educate their children about managing their assets.

Although a thorough understanding of partnership law is essential to preparing an effective limited partnership agreement, the concepts underlying FLP's are not difficult to comprehend and an FLP can be easily integrated into an estate plan.

WHEN IS THE USE OF SUCH

A DEVICE INDICATED?

significantly reduce transfer taxes. Inmost cases, an FLP will be used to facilitate the gifting of limited partner interests from parents to children and other family members without divesting control from the parents. In other cases, an FLP will be used to ensure continuous ownership of assets within the family unit for several generations.

Until most recently, FLPs were used primarily as a means of (1) shifting the income tax burden from parents to children or other family members or (2) to "freeze" the value of assets by shifting future growth in various assets to other family members. Although these uses have been somewhat curtailed by the passage of the Kiddie Tax and the enactment of Code section 2701, the many other benefits provided by the FLP have made it a valuable tool in developing a comprehensive estate plan.

With greater frequency, many practitioners are coming to recognize the many tax and non-tax benefits that an FLP can provide. An FLP would be an appropriate device in the following circumstances:

1. To reduce the value of an estate for transfer tax (e.g. estate, gift and generation skipping) purposes.

Because control of the assets of an FLP is centralized in the general partner(s), a limited partner often experiences an immediate decrease in the value of his interest compared to the value of the property contributed to the FLP. This decrease in value results because of the lack of control and marketability which accompany ownership of a limited partnership interest and the inherent inability to access the capital and profits of the FLP.

It is well accepted that value often appears and disappears in an FLP. Value can appear in the form of a control premium which attaches to the right to manage assets or to liquidate assets into cash. Value can also disappear due to the giving up of management rights and exchange of assets in return for an unmarketable security interest.

Past cases demonstrate that the value of FLP interests typically will be reduced by valuation discounts falling in the 30% to 35% range. Under these circumstances, a married couple with a taxable estate of $2,000,000 could use an FLP to reduce the value of their estate to a point where little or no estate tax is owed.

2. When it is desired to shift the income tax burden from a parent who is in a high income tax bracket to a child or other relative who is in a lower income tax bracket, thus providing intra-family income splitting and tax saving.

bracket, thereby increasing cash flow. Although the

gradual narrowing of the federal income tax rate brackets for individuals (once as high as 70%, now at 39.6%) and enactment of the Kiddie Tax has reduced the effects of income shifting, substantial income tax savings can still be achieved in the majority of cases. (Example 1 at the end of this chapter presents an illustration of the income shifting context in the case of a family business.)

3. Where it is desirable to conduct a family business in a form other than a sole proprietorship or in a corporate form.

In selecting a choice of business entity, the use of a corporation may cause tax problems that would not exist if the business were instead operated as an FLP. For example, subchapter C corporations are subject to personal holding company, accumulated earnings and unreasonable compensation problems, while subchapter S corporations are restricted as to who and how many persons may be shareholders. Similarly, placing a sole proprietorship business into trust may result in the trust being taxable by the IRS as a corporation, usually a very bad result. Family limited partnerships generally offer flexibility in income taxation compared to these other forms of doing business. (A summary of some of the differences in these business entity forms is provided at the end of this chapter).

4. Where a parent desires to maintain control over assets which will be transferred to younger generations through gifts of limited partner interests.

One of the major benefits of an FLP is the ability to retain control over assets without having to own a majority of the interests of the FLP This permits parents to transfer their assets to an FLP and then gift or sell a majority interest (50% or more) to the children while retaining control over the assets. Such control can be achieved by retaining as little as a 1% general partner interest in the FLP. Although the children may hold a majority interest in the FLP, the control over the assets remains in the hands of the general partner.

Use of an FLP can also permit the parents to implement a succession plan for the ownership, management and control of assets so that undesired beneficiaries do not gain access to the assets.

5. Where it is desirable to protect assets from creditors of the partners.

may be effective to shield personal assets by placing them in the hands of other family members, away from the reach of future creditors. In most cases, a judgment creditor will be unable to attach partnership assets to satisfy a debt of an individual partner.

However, although the asset protection features of an FLP (discussed below) may discourage a creditor from aggressively seeking satisfaction of the debt from the partnership assets, the use of an FLP as an asset protection device may also prevent the assets from being reached by the partner since a judgment creditor has the right to attach the partner's interest in  the FL? or attach any assets that are distributed by the FLP to the partner. This characteristic may cause a stalemate between the partner and creditor and encourage settlement of the debt at an amount which is favorable to bath parties.

Protecting assets may also present a number of ethical issues for the practitioner since certain transfers can be attacked as fraudulent conveyances. For these reasons, extreme care and consideration should accompany the use of an FL? for any such purpose.

6. When retention of ownership of assets within the family unit is desired.

By including in the FL? agreement a right of first refusal for transfers of partnership interests, the partners can virtually guaranty that outside persons will not ac quire ownership interests in the FL?. Also, by limiting the tights of a transferee partner to that of an "assignee" (who lacks voting rights) the ability of a partner to sell his or her interest is likely to be severely impaired, thereby achieving the intended goal of maintaining immediate family ownership.

7. Where a parent desires to protect assets, which are to be transferred to younger generations, from being dissipated through mismanagement or divorce.

A parent who makes gifts of property to his children runs the risk that the child will cause the gift to be unwisely managed or lost to a spouse or creditor. These pitfalls can be avoided by placing the assets into an FLP instead and transferring a limited partner interest to the child. In this case, the parent may retain control over the assets until the child is mature and has achieved sufficient financial acumen to manage the property.

8. Where flexibility in setting the rules for managing property is desired.

Unlike an irrevocable trust, an FL? can be amended by vote of a given percentage of partnership interests. This results in a parent being able to easily change the governing rules which apply to the partnership if the parent maintains the necessary percentage ownership interest to amend the agreement.

9. To simplify ownership of assets.

Use of an FL? may allow for cost savings through consolidation of ownership into one entity. Such consolidation may result in diversification of money managers and reduced investment adviser fees. By pooling family assets, the FLP may obtain advantages in terms of diversification and size of investment which cannot be achieved individually by the partners.

Further, by giving the general partner discretion to reinvest partnership profits over the long-term, the FL? can carry out an investment strategy which focuses on long-term benefits to the partners. In situations where generation skipping trusts are used to hold FLP interests during the lifetime of a beneficiary, the death of the beneficiary will not pose a threat to the continued operation of the ELF since estate tax will not be due (to the extent the assets and estate tax "skip" the child).

10. To ease the distribution of assets at death among family members without having to remove the assets from the partnership.

Upon the death of a parent, assets may remain in the partnership and only partnership interests transferred to the heirs (to the extent permitted under the Limited partnership Agreement) thereby enabling the partnership operations to remain intact

11. To avoid out of state probate costs.

Since FLP interests are personal property, they should not be included for probate purposes in those states in which the partnership owns property. Such interests are subject to probate only in the domiciled state of the partner.

12. To discourage family members from fighting over FL? assets and to provide a forum for the resolution of disputes among family members when such disputes arise.

relating to partnership assets. Further, the FLP agreement may be drafted so that the losing partner must pay the court fees of the prevailing party, thereby reducing the likelihood and cost of litigation among the partners.

WHAT ARE THE REQUIREMENTS?

Because state law governs the formation of partnerships, it is necessary to refer to the applicable law of the state in which the partnership is formed to determine the various procedural aspects of forming a partnership. In general, the following requirements will have to be met in order to create a partner ship that will be respected for both state law and tax purposes.

A written agreement setting forth the rights and duties of the partners. If no written agreement exists, the terms of the partnership may be difficult to prove if claimed to be different than under applicable state law.

2. Filing a certificate of limited partnership and fictitious business name statement and obtaining all necessary business licenses and registrations.

3. Obtaining a separate tax identification number for the partnership.

4. Transferring title of all contributed assets into the name of the partnership and opening new accounts in the name of the partnership.

5. Amending contacts to show the partnership as the real party in interest (e.g., adding the partnership as an additional insured on liability insurance policies).

6. Avoiding commingling of partnership assets with those assets of the individual partners or using partnership assets for personal business of the partners.

7. Filing annual state and federal income tax returns and allocating partnership income to the partners.

PROVIDING MANAGEMENT

AND CONTROL

For estate planning purposes, it may be advisable for the partners to implement a succession plan for management. This may be achieved by designating a non-managing general partner who will succeed in the duties of management and control upon vacancy of the general partner's interest.

For most FLPs, possible general partners include one or both parents, either individually or as trustee of a family living trust, subchapter S corporations controlled by one or more persons, mature and financially experienced children or grand children (individually or using trusts for their benefit). It is not recommended that children be given management powers over their parents' assets unless the parents expressly desire to relinquish control and the child has sufficient experience and maturity in managing property.

Even though much of the value of the ELF may be gifted away by transferring limited partner interests to the children, the general partners maintain control of the assets in the FLP even though they retain only a small percentage ownership interest. For this reason, many practitioners recommend use of an FLP for parents who desire to maintain control of their assets while having transferred away most of the assets' economic benefits.

The general partner should have the necessary willingness, knowledge and experience to do the following:

1. Manage and invest partnership assets.

2. Make decisions as to distributions of partnership income and/or assets.

3. File income tax returns on behalf of the partnership and understand income tax law.

4. Furnish annual partnership income tax information (Schedule K-1) to the partners

5. Make necessary filings with the Secretary of State.

6. Give or withhold consent to transfers of partnership interests and amendment of the ELF agreement.

ENSURING FAMILY OWNERSHIP

attention. However, much care must be exercised in drafting the partnership agreement in order to avoid the transfer tax pitfalls of Chapter 14 of the Code (see Chapter 42)

In almost all instances, the FLP agreement should prohibit the partners from selling or transferring their interests in a manner which is disruptive to the continuation of the family asset arrangement plan or disruptive to family harmony. To achieve this result, the ELF agreement typically will provide the partners a right of first refusal to deal with a circumstance where another partner wishes to sell his or her interest to anon- family member. In such cases, the non-selling partners will usually have the right to purchase the interest of the selling partner for cash or with an unsecured long-term promissory note which bears an interest rate favorable to the buyer (but note that the restriction should not constitute 'financial detriment" to any donee partner and such restriction should also satisfy the requirements of Code sections 2703 and 2704). Only if the non-selling partners fail to exercise their purchase rights may the interest then be sold to the non-family member.

If the family members do not wish for the new partner to possess any voting rights, then the agreement should permit them to treat the new partner as a mere assignee who is only entitled to receive income distributions and a proportionate share of partnership income, expenses, deductions and credits. This mechanism provides the family members with protection from the influence of undesired active partners, enhances continued family ownership and does not disrupt good asset management.

REDUCING TRANSFER TAXES

For individuals having substantial wealth, another important benefit of implementing an FLP is the reduction of values for transfer tax purposes.

As a general rule, the value of an FLP interest is worth less than direct ownership of the same percentage interest in the underlying assets of the FLP Put another way, the sum of all of the FLP interests combined does not equal the sum of the assets themselves. This is because ownership of a limited partner interest in an FLP does not convey any rights of management or control over the underlying assets and the FLP agreement prohibits the partners from freely transferring their interests to non-family members. Accordingly, transfer tax values are reduced by the application of discounts (deter mined by appraisal) to reflect these restrictions.

and (2) lower overall estate tax liability on those interests at death retained by a deceased partner. For the majority of FLPs, combined discounts in the range of 25% to 35% are typically achieved.

Despite the reduction in value of FLP interests, the real income production and growth potential of the FLP's assets remain available to the partners since control remains within the family unit.

SECURING VALUATION DISCOUNTS

A discount for lack of control is routinely applied in establishing estate and gift tax values of minority limited partner interests (see Chapter 42 for a detailed discussion of discounts to FLP interests). This discount reflects the inability of a limited partner to control the operations of the FLP and to invest its assets in a manner which is of the greatest benefit to the limited partner.

Because management and investment decisions (including the decision as to when to distribute partnership income) are outside the control and influence of the limited partners, the value of a limited partner's interest is reduced to reflect such lack of control. Typical discounts for lack of control (minority interest) generally range between 20% and 30%.

A discount for lack of marketability is also applied to the value of privately-held limited partnership interests which do not offer a readily available market for trading. Such a discount reflects the fact that a partner who contributes assets to an FL? in return for a limited partnership interest generally will have difficulty in finding a buyer (if one exists).

Factors which typically influence the amount of the discount for lack of marketability include the nature of the FLP's asset mix (e.g. real property, securities, equipment, etc.), the availability and accuracy of information relating to the FL? and its owners, the existence of transfer restrictions against ownership interests, the willingness of the partners to accept new partners, whether income is currently being distributed to the partners and the expected date on which capital contributions will be returned to the partners.

Whereas an understood purpose of most family limited partnerships is to maintain ownership of assets for the benefit of members of one or more selected families, marketability outside the family group is generally disfavored.

The inclusion of rights of first refusal and other transfer restrictions in the FL? agreement will also reduce the market ability of an FL? interest for transfer tax valuation purposes (provided that the requirements of Code section 2703 are

satisfied) further reducing values for estate tax and gift tax purposes. Based upon the number and severity of the transfer restrictions and the factors stated above, lack of marketability discounts may reach as high as 30% or more.

Additionally, in determining the value of an interest in an FLP, consideration should always be given as to whether the interest can be liquidated through the enforcement of withdrawal rights. If the partnership agreement or state law does not confer upon the limited partner any right to withdraw capital, then the interest may remain in the partnership until expiration of the partnership term (often 35-50 years in length) or longer if the partners elect to amend the partnership and continue its term. In such case, the limited partner's interest is said to be "locked-in" to maintaining his investment in the partnership and a lock-in discount is appropriate.

In determining whether a lock-in discount is applicable, Section 2704(b) must be reviewed. This section is discussed in greater detail in Chapter 42.

PROTECTING ASSETS

Family limited partnerships provide a limited degree of asset protection to the partners since assets of the FLP generally cannot be attached to satisfy personal debts of the partners. Under the Uniform Limited Partnership Act, the remedy of a personal creditor is to obtain a "charging order" from a court against the interest of the limited partner. The charging order entitles the creditor to receive the distributions which would normally be paid to the limited partner until the debt is fully paid.

A charging order does not give the creditor any voting rights in FLP matters and the creditor cannot be assured that the general partner will elect to pay out the FLP income to the partners. Furthermore, the IRS in Rev. Rul. 77-137 has indicated that even though the general partner does not pay out any income to the creditor and other partners, the responsibility for paying the income tax attributable to the attached limited partner's interest will fall upon the creditor.³

Notwithstanding the negative aspects of a charging order, a debtor partner is not necessarily guaranteed access to FLP assets if the judgment creditor is insistent upon collecting its debt. The judgment creditor may quietly wait for the partner ship to distribute assets to the debtor partner in hope of attaching the assets immediately after distribution. For this reason, the use of an FLP by itself as an asset protection device is not a guaranteed means of avoiding creditor liability.

features, it is possible that future courts may be reluctant to continue such asset protection for partnerships in which substantially all of the interests are owned by one person or family, or the assets of the partnership are mainly liquid in nature (e.g., marketable securities, cash, etc.).

INCOME TAX ASPECTS

Section 704(e) of the Code was enacted to prevent taxpayers from using family partnerships as a means of splitting family income and circumventing the progressive tax rate structure of the federal income tax. In order for a family partnership to be recognized for income tax purposes, the following three factors must be satisfied:

(a) Capital must be a material income producing factor. This means that the FLP's business must require substantial inventories or substantial investment in plant, machinery or other equipment, as contrasted with a personal service corporation.⁴

(b) A donee or purchaser of a capital interest in a partner ship is not recognized as a partner unless such interest is acquired in a bona fide transaction, not a mere sham for tax avoidance or evasion purposes, and the donee or purchaser is the "real owner" of such interest.⁵

(c) Reasonable compensation must be paid to a donor partner for services rendered to the partnership and the share of income attributable to a donee partner's interest cannot be proportionately greater than his share attributable to his capital.⁶

The validity of an FLP for income tax purposes is dependent upon the a donee partner's "owning" a capital interest. The Code does not define exactly what constitutes "owner ship" of a capital interest However, the regulations state that a transferee of a partnership interest must be the "real owner" of the capital interest and have dominion and control over that interest.

As provided in the IRS regulations, there are four types of retained controls (i.e., powers retained by a donor of an PEP) that are of particular importance in showing that a donee lacks true ownership of his interest. If the donee is not the real owner of his capital interest, then the income attributable to the capital interest will be taxable to the donor. These controls include:

(a) The donor's retaining control of the distribution of income or restricting the amount of such distributions.

(c) The donor's retaining control of assets which are essential to the partnership business.

(d) The donor's retaining management powers which are inconsistent with normal partnership relations?

The cases that have discussed whether a donee is a real owner stress the importance of receiving current distributions of income.

Because partnership agreements frequently limit the ability of a partner to transfer or liquidate his interest, it is important that the partner be able to dispose of the interest "without financial detriment." This test is aimed at determined whether the partner has control over the current benefits of the interest. The term "financial detriment" is interpreted as requiring that the partner be able to realize the fair market value of the interest. Thus, the regulations indicate that a partnership agreement that requires a partner first offer his interest to the partnership (or partners) at the same price as that of any bona fide offer from an outside party will not be considered as imposing a financial detriment upon the interest of a donee partner.

The regulations under Section 704(e) allow a donor to retain management or voting control over a family partnership if the retention is of a manner which is common in ordinary business relationships. However, the donor's retention of control is directly related to the donee's ability to dispose of the interest without financial detriment. Generally, the donee will not be deemed to possess this right unless he is both independent of the donor and has sufficient maturity and understanding of his rights to exercise them. Thus, FL? interests which are transferred to minors should be held either by a guardian or in trust.

In addition to these direct controls, an examination of several indirect controls may determine if a dance partner is a real owner of his capital interest. As provided in the regulations, the following factors are to be examined:

(a) Whether the donee participates in the management of the business.

(b) Whether there have been income distributions to the donee partner.

(d) Whether the partnership has complied with local laws regarding use of fictitious names and other business registration statutes.

(f) Whether the dance's rights in distributions of partner ship property and profits have been recognized.

(g) Whether the donee's interest is recognized in insurance policies, leases, and other business contracts and in litigation affecting business.

(h) The existence of written agreements, records, memoranda, which establish the partnership and partners' rights.

(i) Whether the partnership has filed income tax returns.'⁰

Assuming that a family partnership satisfies the above requirements of Section 704(e). a number of valuable income tax benefits may be provided to the partners. Among these benefits are the following:

1. Pass through of items of income, expense, credit and deduction to the partners.

2. Achieving a "step-up" in income tax basis in FL? assets for interests received from a deceased partner (or upon purchase by a new partner) if an election is made by the general partner under Code section 754.

4. Income shifting to family members.

5. No income tax gain on contribution of assets to the FL? or upon dissolution of the FLP in most cases.

These income tax benefits make FL?s extremely attractive in planning for income tax responsibilities of the partners. If properly structured, the FL? will not increase income taxes and may even reduce income taxes in some cases.

Other tax implications exist in operating an FLP. In general, the following rules will apply:

I. A reasonable allocation of partnership income must be made to any donor partner (which includes a parent who has sold a partnership interest to a family member) to recognize the value of his services to the FLP in order for the family partnership rules of Section 704(e) to be satisfied.

Where interests of family members are acquired by gift and/or intra-family sale, a mandatory allocation of the FLP's profits in proportion to capital contributed, after due allowance has been made for the donor's services, must be made. For example, assume father and son are

each 50% partners in an FLP that has a net income of $100,000. Father is paid $20,000 as reasonable compensation for his services. The remaining $80,000 would be taxed $40,000 each to father and son. This would be in addition to the father's reporting $20,000 of income for his services to the FLP.

If a contributing partner acquires capital from an independent source and not by an intra-family gift or purchase, the mandatory allocations described above will not apply and profit and loss may be allocated in a different manner.

2. Unless found by the IRS to be taxable as a corporation, the partnership itself does not pay federal income taxes since it is a passthrough entity.

However, a federal income tax return (Form 1065) must be filed showing each partner's allocable share of Income, expenses, deductions and credits. Each partner must pay income taxes based upon his or her share of partnership income.

3. Generally, no gain or loss is realized when property is contributed to the FLP.

However, Section 721 should be examined in order to ensure that the FLP is not classified as an "investment company" which would cause income tax on gains to be owed due to the formation of the partnership. The rules for determining whether an FLP is an investment company are the same rules found under Code section 351. Under these rules, an investment company exists if 80% or more of the entity's capital is comprised of marketable securities and diversification o fassets among the partners has occurred. In making contributions to an FLP, the basis of the FLP in the contributed assets is the same basis the property had in the hands of the contributing partners.

4. Gifts of FLP interests are subject to gift tax and will likely raise questions concerning the value of the transferred interest.

The regulations state that the same principles which apply in valuing stock in corporations apply to valuing interests in an FLP. The fair market value at the date of gift will be the value for gift tax purposes.'^t

IMPLICATIONS AND ISSUES IN COMMUNITY PROPERTY STATES

Wisconsin, the income from the separate property of one spouse is community property income. It is in the former group of states where the FLP may require extra vigilance if it is owned prior to marriage, is given or inherited, or is separate property of a spouse for whatever reason. In these instances, it is necessary to make a distinction between the earnings of the manager (which is probably community property) and the income received from ownership of the partner ship interest (which is separate property).

Using the separate property income from the FLP to purchase items that are taken in the names of both spouses creates a taxable gift (with the exception of real property taken as joint tenants) Thus, if the partner-spouse receives $80,000 income from an PEP that was owned prior to marriage, over and above his wages from the FLP, and if he uses the $80,000 to buy stock in both his and his spouse's names, he will have made a gift of $40,000 taxable to the spouse. For transfers after 1981, this does not create a federal gift tax problem because of the unlimited marital deduction that applies to both separate property and community property (see Chapter 37). Depending upon state gift tax law, however, it may still create a gift tax problem.

Another frequently encountered problem in an FLP in community property states is the failure to designate in the agreement whether the FLP interest is separate property or community property. This failure is a great source of comfort and fees to litigation attorneys in divorce proceedings. This is rather important in view of the high rate of divorce over the past ten years.

DETRIMENTS

As exists with the formation of any entity, use of an FLP also has some detriments. For example, the following issues will generally be encountered:

1. The PEP will have to pay applicable minimum franchise tax fees in most states in which it does business (currently $800 annually in California).

2. The FLP must file annual income tax returns and keep separate accounting records.

3. In states with restrictions on real property tax increases, great care should be taken in contributing real property to the FLP and in transferring partnership interests so that the property tax assessment on the property is not adversely changed.