Family Limited Partnership (FLP) Valuation Discounts

Transfer Wealth at Discounted Values—With Documentation That Withstands IRS Scrutiny

Family limited partnerships allow you to transfer wealth to the next generation at discounted values, reflecting the limited partner’s lack of control and lack of marketability. But the IRS knows this playbook well. Without meticulous planning and contemporaneous documentation, the discounts you claim can be disallowed entirely, and the full value of the underlying assets can be pulled back into your estate under Sections 2036 and 2038.

At Alan Goldstein & Associates, we structure and defend FLPs with the documentation the Tax Court has repeatedly demanded: evidence of a legitimate, significant non-tax purpose, proper operational formalities, and qualified appraisal support for every discount claimed.

The Issue: Why the IRS Challenges FLP Discounts

The Section 2036 Problem

The IRS’s primary weapon against FLPs is Internal Revenue Code § 2036(a). If a decedent retained the possession or enjoyment of, or the right to income from, property transferred to an FLP—whether expressly or by implied agreement—the full value of that property is included in the gross estate, without any discounts .

The IRS looks for telltale signs of retained enjoyment: the decedent contributed nearly all their assets to the FLP, leaving insufficient funds for living expenses; partnership distributions were used to pay the decedent’s personal expenses; formalities were ignored; or the arrangement bore no resemblance to an arm’s-length joint enterprise .

The Bona Fide Sale Exception

The defense to a § 2036 attack is the bona fide sale for adequate and full consideration exception. To qualify, the transfer must satisfy two prongs: (1) the transfer was made in good faith and for adequate consideration, and (2) there was a significant and legitimate non-tax reason for creating the entity .

Courts have recognized valid non-tax purposes including centralized asset management, involving the next generation in business operations, protecting assets from creditors or failed marriages, and preserving a cohesive investment philosophy . Crucially, these purposes cannot be theoretical—they must be actual motivations, documented contemporaneously during the planning phase .

The Discounts: DLOC and DLOM

The tax benefit of an FLP lies in two valuation discounts:

Discount for Lack of Control (DLOC): Limited partners cannot control distributions, investment decisions, or partnership dissolution. This economic disadvantage justifies a discount from the FLP’s net asset value .

Discount for Lack of Marketability (DLOM): Limited partner units have no ready market and are difficult to sell, especially when the partnership agreement restricts transfers to outsiders .

Critical: These discounts are multiplicative, not additive. A 20% DLOC followed by a 30% DLOM produces a combined discount of 44%, not 50% . Proper sequencing matters.

Our Key Services

FLP Formation and Funding (90-Day Rule)

We structure and fund your FLP with the operational formalities courts require: separate partnership accounts, documented capital contributions, adherence to the partnership agreement, and no commingling of personal and partnership funds . We advise on the timing of asset transfers and gift transfers to avoid step-transaction challenges, and we ensure that the FLP holds assets appropriate to its stated business purpose—not just passive cash and marketable securities .

DLOC and DLOM Valuation Studies

We coordinate with qualified appraisers to develop defensible discount analyses grounded in market data. Our approach follows the methodology upheld in the first FLP Tax Court case, Church v. United States, where the court accepted a combined 57.6% discount using income and market approaches . We avoid the errors that sink weaker appraisals—such as using only the most aggressive quartile of comparable closed-end funds to inflate the control discount, a mistake the Tax Court rejected in Estate of Kelley .

Qualified Appraisal Coordination (ASA, CVA, ABV)

The IRS will challenge any gift of FLP units based on a do-it-yourself appraisal . We coordinate with credentialed appraisers holding ASA, CVA, or ABV designations to produce USPAP-compliant reports that tie each claimed discount to market evidence and the specific terms of your partnership agreement . The appraisal must show its work—naming the data behind each discount and explaining how the agreement’s terms limit the holder .

Section 2036 Retained Interest Defense

We structure your FLP to avoid the implied agreement trap. That means ensuring you retain sufficient assets outside the partnership to cover your living expenses without relying on distributions . It means distributions are governed by the partnership agreement, not ad hoc requests for personal funds. And it means the FLP operates as a genuine business entity, not a vehicle for personal financial management .

Bona Fide Sale Exception Documentation

We create the contemporaneous record that proves your non-tax purposes were real. Every letter, email, and memo written during planning should be prepared with the understanding that it may one day be read by an IRS agent or a Tax Court judge . We document negotiations among family members, the business plan, and the specific operational needs—such as centralized management of diverse assets or creditor protection—that motivated the FLP’s creation.

Estate of Jones, Fields, Kelley, and Bigelow Compliance

We track the evolving case law and structure your FLP to satisfy the standards courts have applied:

  • Estate of Fields (2024): The Tax Court upheld the IRS’s § 2036 challenge where the decedent’s retained enjoyment was evident, despite a qualified appraisal claiming a 15% DLOC and 25% DLOM . The case underscores that discounts are meaningless if the underlying transfer is pulled back into the estate.
  • Estate of Kelley: The court reduced the taxpayer’s claimed DLOC from 25% to 12% because the appraiser improperly isolated the fourth quartile of closed-end funds, conflating marketability discount with control discount .
  • Estate of Bigelow: The Ninth Circuit affirmed § 2036 inclusion where the decedent retained an implied right to income from transferred property, emphasizing the importance of formalities and sufficient retained assets .
  • Estate of Jones: The Tax Court held that Texas partnership agreement liquidation restrictions were not “applicable restrictions” under § 2704(b) and need not be disregarded, preserving the discounts .

Why Choose Alan Goldstein & Associates?

  • Case-Aware Structuring: We build FLPs that mirror the facts courts have approved—genuine non-tax purposes, arm’s-length negotiations, and operational discipline—while avoiding the red flags that trigger § 2036 inclusion.
  • Valuation Discipline: We coordinate with appraisers who ground every discount in market data and properly sequence DLOC and DLOM, avoiding the aggressive methodologies that courts have reduced or rejected.
  • Contemporaneous Documentation: The best defense against a § 2036 challenge is a paper trail created before the IRS ever appears. We build that record from day one.
  • Integrated Estate Planning: FLP discounts work best when coordinated with your overall gift and estate tax strategy, including annual exclusion gifts and generation-skipping planning.

Take the First Step Toward Protecting Your Family’s Wealth

An FLP created without proper documentation is a discount waiting to be disallowed. An FLP built correctly transfers wealth at a reduced value—and survives IRS scrutiny.

Contact Alan Goldstein & Associates today for a confidential consultation. Let us evaluate whether an FLP is right for your family and build it to withstand challenge.