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Insurance Limited Partnerships As an Alternate Estate Planning Tool

By Lawrence L. Bell

Valuation discounts in estate planning has permitted the transfer of assets from one generation to another in an economically efficient manner. Two of the various discount methods claim lack of control (minority interest discount) and lack of marketability. The IRS has traditionally objected to these approaches in intra-family transfers, while Congress has attempted to legislate away these “loopholes” unsuccessfully and the Treasury Department is contemplating new regulations to accomplish this goal.

In the past, the IRS position was that a minority interest discount was not available in valuing an interest in an entity (corporation, partnership or limited liability company) that was controlled by family members. Revenue Ruling 93-12 reflects that the IRS was unsuccessful maintaining that position. The fact pattern of that ruling involved a shareholder who owned 100% of a corporation made gifts of 20% of the stock to each of his five children. The IRS ruled that the family's control of the entity would not be considered in valuing the gifts of minority interests. After the ruling, family limited partnerships (FLPs) and limited liability companies (LLCs) became more popular estate planning vehicles because the available valuation discounts allowed for more wealth to be transferred free from estate, gift and generation skipping transfer (GST) taxes.

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