Key Administrative Practices
Ideally, the family office should be involved from the inception of the FLP to become familiar with its structure and how it should be operated. The attorneys responsible for forming the FLP generally run the show during formation, but the family office can help by doing the following:
1. Facilitate discussions among family members and trustees who will be involved in the FLP to discuss valid, non-tax related business purposes.  For instance, some family members may want to pool assets to invest in a hedge fund or private equity fund.  
2. Ensure that not only the parents, but also junior family members (or trusts created for their benefit) participate in the creation of the FLP and have an opportunity to contribute their own assets, as opposed to assets that have been recently gifted to them for the purpose of contribution to the FLP.
3. Encourage clients to consider the long-term financial and interpersonal implications of FLP planning. The FLP will probably be kept in place well after the death of the matriarch or patriarch, so clients should consider whether they are able to tie up these assets for a period of years.
4. Facilitate negotiations among the various partners on the terms of the partnership agreement and act as a liaison between family members and their respective counsel.  
5. Offer to serve as the general partner or the manager (in the case of an LLC) of the FLP.  This makes it far more difficult for the IRS to argue that a deceased general partner maintained control over the assets prior to his or her death and that the assets should be put back into the deceased general partner's estate at full value.
6. Ensure all of the partners have properly executed the formation documents and transferred their individual assets into the partnership accounts or into the name of the FLP.  A common defect of many FLPs is the failure of the parties to properly transfer assets.
7. Ensure that FLP accounts have been opened in a timely manner and that a tax identification number has been obtained.
8. Ensure that the partnership tax "diversification" rules are not violated in connection with the formation of the FLP.
9. Communicate with counsel and the various partners to create protocols that will be necessary to properly administer the FLP on a day-to-day basis and ensure that these protocols are understood and strictly followed.

Limiting The 'Bad Facts'
Once the FLP has been formed, the family office can add enormous value to the legitimacy of the entity by paying attention to and complying with its protocols. It is, for example, important to maximize "good facts" and minimize "bad facts" in FLP administration. This refers to the unofficial rubric that the IRS typically uses to determine whether the FLP should be respected or disregarded as a tax avoidance structure. The IRS will make a decision based on whether the formalities of the FLP were respected and whether the partners treated the FLP as an operating business between non-related third parties.  Building a record of the FLP's activities can go a long way toward improving the credibility of the FLP in an IRS audit.

The harsh reality is that there are likely many FLPs that have been neglected by their partners and are "time bombs" waiting to explode upon the death of the matriarch or patriarch. "Bad facts" FLPs are not in short supply. The typical IRS agent is investigating numerous flawed entities at any given time. Ongoing administration by a family office, however, can improve the appearance of an FLP so its facts are much stronger than other FLP cases lying on the IRS agent's desk. This should give the FLP credibility and strengthen its case in the event of an audit.  

What follows are ways family offices can maximize good facts and minimize bad facts in FLP administration:
1. Respect the formalities of the FLP's partnership agreement.  Prepare a list of the administrative requirements under the partnership agreement (e.g., requirement to provide annual financial statements to all partners, notice and consent requirements with respect to transfer of partnership interests, etc.) and make sure the list is followed.
2. Hold routine partnership meetings to review investment performance and make investment decisions. Prepare and maintain minutes documenting the discussions to memorialize any decisions.  
3. Change the investment makeup of the FLP after contribution of assets.
4. Confirm that assets have been properly contributed to the FLP promptly upon formation before any transfers of partnership interests.
5. Maintain FLP stationery for the partnership.  Memos or correspondence on such stationery should document any partnership decisions.
6. Do not allow family members to contribute all or even most of their assets to the FLP.  Instead, instruct family members to maintain, in their own names, a significant amount of assets outside of the FLP.  The family members should not look to the FLP to make distributions for their own financial support.
7. Do not allow the FLP to make distributions that are not pro rata to all partners.  No family member should continue to receive income or other distributions from the FLP unless all of the other partners are receiving similar pro rata distributions.
8. Do not allow family members to treat the FLP assets as if they are their own. The family office should ensure that estate taxes resulting from the death of a partner are not paid out of FLP assets. Tax court has made examples of owners of FLPs that were essentially the alter ego of the taxpayer.  
9. Do not allow family members to contribute personal residences to the FLP. If this is unavoidable, occupying partners should at minimum pay fair market rent to the FLP for their occupancy.
10. Do not allow the commingling of partnership assets with other independent assets of any partner.

An FLP that is properly administered and has few bad facts-the typical FLP will always have some bad facts-will have a much greater chance of withstanding IRS scrutiny. Indeed, in a recent tax court case the taxpayers prevailed over an attempt by the IRS to undo an FLP, despite a significant number of bad facts. In upholding the FLP, the court noted that the parties intended to treat the partnership as a collective investment vehicle in order to provide a means for the management of the family's assets, the taxpayer maintained significant assets outside of the FLP, the partners held partnership meetings in which they discussed investments and the partners maintained the partnership after the taxpayer's death.  

To the extent that it can properly administer an FLP and limit bad facts, the family office can play a large role in determining whether an FLP can withstand an IRS challenge. In short, the FLP structure and the family office are a perfect union. With little additional effort and expense, family offices can ensure that the benefits of this powerful estate planning tool are preserved, thereby adding tremendous value to their representation of wealthy families.    

Edward A. Renn and N. Todd Angkatavanich are partners of Withers Bergman LLP, an international private client law firm with several offices worldwide.  They practice out of the firm's Greenwich and New Haven, Conn., and New York offices.  The authors would like to thank Hallie Aronson, an associate at Withers Bergman LLP, for her valuable contribution to this article.