The Restricted Management Account – An FLP Alternative
By Andrew T. Wolfe, CPA, JD, LLM

In light of the IRS' sustained attacks on family limited partnerships and family limited liability companies, high net worth individuals may want to consider some new techniques for accomplishing tax-efficient transfers of wealth. The restricted management account (or RMA) appears to be a simple and cost effective method for accomplishing such transfers. RMAs seek to accomplish much the same goal as family limited partnerships (i.e. discounting assets), but with a more distinct abandonment of control that, hopefully, will pass IRS muster.

Here's how an RMA works. An account is established with a bank or trust company under an agreement containing certain restrictions designed to enhance the account's overall investment performance. During the term of the agreement (typically 5 to 7 years), the bank or trust company has the exclusive right to manage the investment portfolio in the account. In other words, the person setting up the RMA must relinquish all control over the assets placed in the account. Under the terms of the agreement, the account owner cannot withdraw the funds from the RMA, and the bank or trust company is obligated (for a fee) to manage the assets in the RMA until the term ends. In the typical RMA, the account owner cannot transfer ownership of the RMA without the prior consent of the bank or trust company, except for transfers to family members.

This fairly straightforward arrangement accomplishes two important things. First, it allows the bank or trust company an opportunity to implement an effective, long-term buy-and-hold strategy, rather than being forced to maintain short-term performance in an effort to retain the account holder as a client. Second, it imposes a restriction on the account assets that depresses values for transfer tax purposes. The account owner has in effect given up both control and transferability. Therefore, an RMA transfer during life or at death should be entitled to valuation discounts for lack of marketability, lack of control and lack of liquidation rights. Of course, a qualified appraiser should be retained to determine the exact amount of such discount.

It should also be possible to place an IRA in an RMA and thereby reduce its value for purposes of determining post-age 70 1/2 required minimum distributions. By reducing the amount that must be taken out of the IRA each year, the IRA owner can reduce current income taxes and maximize the benefits of tax-deferred growth within the IRA.

Other potential benefits associated with an RMA include the following:

• The account owner may be able to negotiate a lower management fee in exchange for the bank or trust company having the guaranteed fee for a fixed term.
  
• The RMA is simple to create and inexpensive to administer, and can provide continuity of management for those heirs who eventually receive the RMA (i.e. it would prevent the kids from being able to "trade their account away").
  
• Income tax reporting is no different than prior to establishing the RMA – the account owner reports all income, gains and losses on his or her Form 1040.

The fact that RMAs are relatively new and have not been the subject of definitive cases or rulings is a valid concern. Other drawbacks include a complete lack of control over investment decisions and lack of access to the assets in the RMA. Nonetheless, RMAs appear to be growing in popularity as a viable alternative to a family limited partnership – particularly for long-term investors for whom avoidance of estate taxes outweighs the demand for current income.