A family limited partnership can be an effective estate planning tool.

However, to be successful in removing future appreciation in value from the estate of a wealthy family member, it is important that the family limited partnership (FLP) meet strict guidelines, both in terms of the drafting of the legal documents and in how the FLP actually operates in practice.

The Estate of Erma V. Jorgensen (CA 9, May 4, 2011) demonstrates the latter principle. Regardless of what the legal documents say, the courts will look at how the parties actually conduct themselves.

In this case, the Court of Appeals for the 9th Circuit upheld an earlier Tax Court decision that the assets Jorgensen purportedly transferred to an FLP were included in her estate. Although Jorgensen had transferred about $2 million of investment assets to two FLPs, she continued to access the funds for personal purposes by writing checks from the FLPs’ bank accounts.

The Tax Court concluded that there was an implied agreement at the time of the transfers that Jorgensen would retain the economic benefits of the property, even if the retained rights were not legally enforceable. On appeal, the estate argued that Jorgensen retained only de minimis benefits and that her estate should include only the amount of funds that she actually accessed from the FLPs.

The appeals court concluded that $90,000 in checks personally written by Jorgensen and the use of $200,000 of FLP funds to pay her personal estate taxes were not de minimis. The court also agreed with the Tax Court that there was an implied agreement that Jorgensen could have accessed any amount of the transferred assets.