ESTATE PLANNING WITH THE FAMILY LIMITED PARTNERSHIP
A "family limited partnership," as the name implies, refers to the creation of a partnership business entity among
close-knit family members. A family limited partnership does not necessarily have to involve a business. For instance, it
can be created for a particular asset, such as real estate or a mutual fund. This structure is a popular estate planning tool
because it can provide both tax and non-tax advantages.
One obvious non-tax advantage is that when a transfer restriction is made a part of the family limited partnership
arrangement, there is assurance that the business will be kept in the family. The structure also allows the operator of the
business (presumably a parent) to maintain control of the business assets until retirement or death. This is accomplished
by having the parent retain a general partnership interest that includes management control of the business. The children
become limited partners. If a particular child were to be groomed to take over the management of the business, the parent
could, over time, transfer fractional shares of the general partnership interest to that child.
Another important non-tax advantage is the protection of business assets. Although the personal assets of the general
partner can be reached by creditors of the business, the liability of the limited partners is restricted to their interests in the
partnership. Also, the assets placed in the partnership by the donor/parent are protected from his personal creditors. His
income from the partnership can be reached by creditors, but not the assets.
Federal Income Tax
The primary income tax advantage to be gained from forming a family limited partnership is the deflection of income
from the parent, who is typically taxed at higher marginal rates, to the children, who are taxed at lower rates. Where the
donor/parent retains control as the managing partner, the strategy is to allocate earned income to the parent at the lowest
reasonable level. The unearned income (return from capital investment) is divided among the parent and children as
partners in proportion to their capital interests.
Estate and Gift Taxes
An initial federal estate tax advantage derived from the creation of a family limited partnership is that the allocation of
income among the children will prevent the accumulation of such income in the estate of the donor/parent. The main
focus is on the savings that can be realized on federal estate and gift taxes.
If the donor/parent transfers limited partnership interests to family members, the value of those interests will not be
included in the parent's estate at death. However, when partnership interests are transferred to family members, there is
potential gift tax liability, which is calculated at the same rates as the federal estate tax. This problem can be alleviated by
taking advantage of the annual gift tax exclusion, which for 2002 is $11,000. A fractional interest can be transferred free
of gift tax to each donee up to the amount of $11,000 per year ($22,000 if the donor's spouse consents to the transfer).
The two primary features by which federal estate tax savings are achieved are the estate freeze and the valuation discount.
The object of an estate freeze is to transfer the future appreciation of the family business to the children. The effect is to
prevent the appreciation of the senior family members' interests in order to minimize estate taxes.
The valuation discount feature discounts the value of the fractional shares into which the business is divided so that the
total value of the shares will not equal 100% of the predivision value of the business. There are different methods that can
be used to discount the value of the shares. These discounts reduce the value of each partner's share for federal estate tax
purposes and benefit both the donor of the partnership interests and the donees.
Recently, the IRS has taken the offensive against valuation discounts. One Tax Court case shows that, in order to secure
the "lack of marketability" discount, the donee must not be given powers that would allow him to liquidate the
Another recent Tax Court case indicates that in order to avoid inclusion of the transferred limited partnership interests in
the decedent's estate, care should be taken to avoid the appearance of the decedent treating the property as his own. For
example, the transferor's residence should not be transferred to the family limited partnership unless the transferor is to
Given that the family limited partnership is such a powerful and complicated entity with major business, tax, and personal
consequences, anyone considering forming such a partnership should seek qualified legal advice.
In the age of online commerce, "signing on the dotted line" has for many transactions evolved into "clicking on the 'I
agree' box." But the resulting "clickwrap" agreement may be just as enforceable in court as if the parties had solemnly
written their signatures at the end of a paper contract. As with so many twists on conventional legal concepts that have
been ushered in with the Internet, courts are having to adapt time-tested principles on formation of a contract to the
In one case, a company paid thousands of dollars for sophisticated software. The company claimed that it was entitled not
only to use the software but also to receive perpetual upgrades and support. As evidence of such a bargain, the company
pointed to the purchase order for the transaction. The seller of the software countered by relying on a later clickwrap
license agreement in the software itself that limited its liability to the price paid for the software.
The court ruled that the language in the clickwrap agreement that limited the seller's liability was binding. The buyer
clearly had given its assent by clicking "I agree," just as if its representative had signed a standard contract. The only
issue, according to the court, was whether clickwrap license agreements are an appropriate way to form contracts, and the
court held that they are.
The court was aware of and sympathetic to the context in which most clickwrap agreements are created. The typical
consumer, having paid a substantial sum for software, rushes it into the computer, clicks on "install" and scrolls past the
fine print in the license agreement. Arriving at the "I agree" box, the customer clicks on it with hardly a thought. The
lesson from this case is that the click of a mouse is the equivalent of the stroke of a pen.
Clickwrap agreements are no less enforceable than conventional contracts, but neither will they be recognized by courts if
the basic elements of offer and acceptance are absent. From the early common law of England to American law today,
promises become binding only when there is a meeting of the minds. As another court faced with a disputed clickwrap
agreement put it, "[a]ssent may be registered by a signature, a handshake, or a click of a computer mouse transmitted
across the invisible ether of the Internet."
That court had to resolve a dispute between visitors to a website who obtained a free software program that makes it
easier to download files from the Internet. Someone wishing to download the free program would see at first only a
"download" box but no reference to a license agreement. Only on the second screen was there an invitation to review and
agree to a license agreement. A click on that invitation led to an unequivocal statement that the user must agree to the
terms in the agreement before installing the software, and another click revealed the agreement in full. In short, visitors to
the website were not required to indicate affirmatively their assent to the license agreement, or even to view the
agreement, before downloading the software.
Individuals who had downloaded the software sued the provider because they believed that using the software caused
private information about their Internet activity to be transmitted to the software provider, which was a violation of
federal law. The court ruled that they were not bound by a clause tucked away in the license agreement that required
arbitration of disputes in a specific location. From the user's vantage point, the software was like a free neighborhood
newspaper at a supermarket counter, there simply for the taking. The provider of the "newspaper" could not impose
contract terms on its taking without clearly requiring assent to the terms before a customer could take the paper.
FAIR LABOR STANDARDS ACT
The Fair Labor Standards Act (FLSA) is the source of minimum wage, overtime pay, recordkeeping, and child labor
standards affecting over 100 million private sector and governmental workers. To be covered by the FLSA, an enterprise
must have employees whose work has at least an indirect connection to interstate commerce. In most cases, a firm must
do at least $500,000 in business annually to be covered, although some entities, including hospitals, schools, and
governmental agencies, are subject to the FLSA regardless of volume of business.
The FLSA is far-reaching, but it does have its limits. For example, it does not require pay for vacations, holidays,
severance, or sickness, nor does it mandate meal or rest periods, holidays off, or vacations. When an employee is fired,
the FLSA does not require a discharge notice, a reason for the discharge, or immediate payment of final wages. Assuming
the employee is at least 16 years old, the FLSA also does not limit the number of hours in a day, or days in a week, that an
employee may be scheduled to work.
Wages and Overtime
Workers covered by the FLSA currently are entitled to the minimum wage of $5.15 per hour and overtime pay that is at
least one and one-half times their regular rate of pay after 40 hours of work in a workweek. Some minimum wage
exceptions apply under specific circumstances to disabled workers, full-time students, workers under 20 in their first 90
days of employment, tipped employees, and student-learners. Wages required by the FLSA must be paid on the regular
payday for the covered pay period. Employers cannot effectively reduce the wages of their employees below amounts
required for the minimum wage or for overtime pay by making deductions from paychecks for such items as shortages,
required uniforms, and tools of the trade.
For the FLSA to apply, there must be an employment relationship that is distinct from other arrangements, such as hiring
an independent contractor. Even when it does apply, the FLSA contains many specific exemptions. The exemptions may
be from overtime pay, from both the minimum wage and overtime pay, or from child labor provisions. Doubts about
application of an exemption generally are resolved against the employer. Employers should scrutinize the exact
requirements for an exemption before assuming it applies.
Some of the employees exempted from the overtime pay requirement are commissioned sales employees whose earnings
average at least one and one-half times the minimum wage for each hour worked and certain computer professionals who
make at least $27.63 per hour. Examples of workers exempted from both the minimum wage and overtime pay include
employees of certain seasonal and recreational establishments and white collar employees in executive, administrative,
professional, or outside sales positions who are paid on a salary basis.
The child labor provisions in the FLSA are meant to protect the educational opportunities of children and to prohibit their
employment in unhealthy or dangerous jobs. The FLSA restricts hours of work for those under 16 and lists hazardous
occupations that are too dangerous for young workers. The rules vary with the age of the worker and the occupation. At
age 18, an employee is no longer covered by federal child labor rules.
For private businesses, the main enforcer of the FLSA is the federal Department of Labor's Wage and Hour Division. Its
representatives conduct investigations either on their own initiative or in response to complaints. The Secretary of Labor
can sue to force compliance and to recover unpaid minimum and/or overtime wages, plus an equal amount as liquidated
damages. If such a suit has not already been filed, an employee can bring a private action for the same remedies, plus
attorney's fees and court costs. Willful or repeated violations of the minimum wage or overtime requirements can result in
civil money penalties or criminal prosecution. Aiming at the fruit of underpaid or illegal labor, the FLSA has a "hot
goods" provision that prohibits anyone from shipping, offering to ship, or selling in interstate commerce any goods
produced in violation of the FLSA.
STARTING A BUSINESS? GET AN EIN.
A new business must get a nine-digit employer identification number (EIN) from the Internal Revenue Service if it either
pays wages to one or more employees or files pension or excise tax returns. An EIN is like a Social Security number for a
business. It is used when filing a federal tax return, as well as for correspondence with the IRS or the Social Security
IRS Form SS-4 is an application for an EIN, with information on how to apply by mail or by telephone. The IRS now has
a toll-free telephone number for getting an EIN: (866) 816-2065. Taxpayers also can download forms from the IRS
website at www.irs.ustreas.gov.
LANDLORDS AND CREDIT CHECKS
Landlords are free to use credit reports in evaluating prospective tenants, but they must follow requirements set out in the
Fair Credit Reporting Act (FCRA). A new guidance has been issued that describes how the FCRA applies to landlords
and what the consequences are for noncompliance. The guidance focuses especially on a landlord's obligation to provide
an applicant with an "adverse action notice" when adverse action is taken based on information in the applicant's
A consumer report is a compilation of information about a person's credit characteristics, character, reputation, lifestyle,
and rental history. A report is covered by the FCRA only if it was prepared by a consumer reporting agency (CRA). The
major credit bureaus are CRAs, as are many tenant-screening services and reference-checking services. If a landlord uses
its own employees to verify personal, employment, and previous landlord references, the FCRA does not apply.
The most obvious adverse action that will trigger the notice requirement is outright denial of a rental application.
Something short of that can also constitute adverse action so long as it is prompted by information in a consumer report.
For example, a notice must be given to applicants who are required by the landlord to: have a co-signer on the lease; pay a
deposit not required for other applicants, or an unusually large deposit; or pay rent that is higher than for another
The essential contents of an adverse action notice are established in the FCRA. The notice must contain the name,
address, and telephone number for the CRA that supplied the report, a statement that the CRA did not make the rental
decision and that it cannot give the specific reasons for that decision, and notification that the consumer has rights to a
free report and to dispute the accuracy or completeness of information in the report. Even landlords for whom a consumer
report played only a minor role in the decision to take an adverse action must give the notice to the applicant. A written
notice is the best proof of compliance.
Landlords are well-advised to stay in compliance with all FCRA requirements, including adverse action notices, as the
consequences for noncompliance can be significant. For lack of required notices, a landlord can be sued by individuals in
federal court and made to pay compensatory damages, punitive damages if the violations are deliberate, and attorney's
fees. Federal or state agencies can also sue landlords and get civil penalties. An isolated and inadvertent failure to send a
notice, however, will not result in landlord liability if the landlord has reasonable procedures in place to assure
compliance with the FCRA.
CASE BY CASE
Stolen Customer Lists
Home food service companies sell and deliver food products and appliances to their customers, many of whom later
reorder more products. When a home food service company bought a customer list of one of its competitors, what might
have been a competitive advantage instead became a legal headache. The list had been stolen and the food service
company that bought it knew it was stolen.
The company whose list got into the wrong hands sued the purchaser of the list for misappropriation of a trade secret.
Some courts have refused to recognize customer lists as protected trade secrets when they contain information that is
readily available from public sources. The essence of a trade secret is that it has value because it is not easily
ascertainable. The customer list for the home food service company was protected because of the time and effort that had
been expended to identify particular customers with particular needs or characteristics. The defense that the list contained
only information that was easily compiled was undercut by the fact that the defendant had paid a lot of money for it.
A state court found a violation of the law governing trade secrets. It ruled that monetary damages should be awarded to
the plaintiff based on net profits earned by the defendant from improper use of the list. The court also barred the
defendant from ever using the stolen list again.