Many of your clients have family limited partnerships. With the tax winds blowing differently right now, should your clients dissolve their FLPs? The short answer: If an FLP was formed for the appropriate reasons and operated properly, dismantling it is unlikely to be worthwhile. If the FLP was formed for the wrong reasons, or wasn't operated properly, the client should clean up his act, which might call for dismantling the FLP if it were so botched that it could not be resuscitated cost effectively.

Why do you care? Because properly used FLPs enable advisors to manage and invest client investments better—what all planners strive for, even when the steps are outside their direct purview.

As with so many financial and estate planning products, advocates for one view or another push their message, with little regard for specific client situations. Now, many of them are pushing for FLP dissolution. So let's look at some of the pros and cons. We'll do this in Shakespearian fashion, "To dissolve or not to dissolve, that is the question."

Reason 1 to dissolve: The annual cost of maintaining an FLP (bookkeeping, tax returns and legal bills) is too great.

Why not? When an FLP is administered properly, there are costs. Unfortunately, in an effort to save money, some clients undermine the planning objectives that were the basis for originally setting up the FLP. Costs should first be offset by any actual savings, and then the net cost weighed against the benefit. If a client family has 12 different investment accounts, would they incur greater management and investment costs than the aggregated FLP does? If there is a savings (the aggregate investment relationship is large enough to lower management fees), that savings will offset administrative costs. Also, individual investment accounts require some bookkeeping and tax preparation time. An FLP requires more, but the entire cost is not incremental. Finally, what are the benefits? They include asset protection, control and avoidance of probate, to name a few.

Reason 2 to dissolve: Dissolution is simple and shouldn't cost much; just return to me my share of the assets.

Why not? Not so fast. Distributing securities from an FLP to the partners may not be tax-free if the value of those securities exceeds the adjusted tax basis in the FLP. Your client needs a CPA (perhaps one specializing in partnership tax) to figure it out. Also, many FLPs contain a variety of assets, from interests in a family business to marketable securities. Usually, different family members want different assets. That results in disproportionate distributions of FLP assets, and that spells tax complexity and potential cost.

Reason 3 to dissolve: Congress is repealing the gift- and estate-tax discounts on FLPs owning passive assets like securities and real estate, so why keep them?

Why not? It's true that the Pomeroy bill, H.R. 436, would do just that. But this bill has been proposed before and hasn't passed, so perhaps there is still a window of planning opportunity. Further, FLPs should never have been set up only to obtain gift- and estate-tax discounts. All those other benefits (asset protection, control, probate avoidance, etc.) are unaffected by the gift- and estate-tax change, even if it happens.

Reason 4 to dissolve: The estate-tax exclusion is $3.5 million. I won't face an estate tax, so why keep an FLP?

Why not? In 2011, the exclusion is scheduled to drop to $1 million (leaving the vast majority of Americans nowhere close to paying an estate tax). Given that the deficits in Washington are growing fast, there will be real pressure to find dollars anywhere, and rich people are a likely target. Also, about 20 states remain decoupled from the federal estate-tax system, so your client might face a significant state estate tax, even if his or her estate is below the federal threshold. So if your FLP works, keep it humming.

Reason 5 to dissolve: While an FLP can provide some asset protection, it's not perfect.

Why not? Few things in life are 100%, but that's no reason not to use them. If an FLP is properly operated and planned to maximize asset protection, it can provide a greater level of protection. There are also different types of risks that an FLP can protect against. For example, divorce can decimate a client's assets. An FLP can help maintain the integrity of separate assets a client might receive, like gifts or inheritances. FLPs prevent commingling of assets tremendously.