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| FAMILY LIMITED PARTNERSHIPS: TRANSFER VALUE, KEEP CONTROL |
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You have worked most of your life to build up the value of your estate. You would like to continue your lifestyle and provide for your children after your death. But your lawyer or accountant has told you that Uncle Sam is your secret partner, and this “partner” is going to want to cash out his interest on your death. His cut? Between 41 and 50 percent of the fair market value of your estate as of your date of death. Is there a way you can transfer value yet keep control? Partnerships As a result of certain recent developments, use of a partnership to transfer value to your children has become one of the hottest wealth transfer vehicles in use today. But first, a little background. There are essentially two kinds of partnerships: general partnerships and limited partnerships. In a general partnership, all partners have the right to control the partnership and are personally liable to creditors. In the limited partnership, however, only the general partners are personally liable to creditors. A limited partner, like a corporate shareholder, is only liable to the extent of his investment in the partnership. More importantly, the general partner or partners in a limited partnership retain complete control over the partnership. They alone, and not the limited partners, determine when income distributions are to be made and what direction the business is to take. A “Family Limited Partnership” (“FLP”) is no more than a regular limited partnership where all of the interests are held by family members. Advantages of the FLP Consider the following example. You and your spouse each contribute property to a FLP. In exchange, you and your spouse each receive a 1% general partnership interest and you also receive a 98% limited partnership interest. The value of the partnership as a whole is $1 million. Now you make gifts to each of your three children of a 3% limited partnership interest. Because your children cannot control the business or even sell their interest readily, the IRS typically will accept a discount in the value of these gifts. Although a straight 3% of $1 million is $30,000, with a 33 1/3% discount the value of each gift drops to $20,000. (Actual discounts have ranged from a low of 15% to over 65%.) You and your spouse consent to split the gifts for gift tax purposes, so, although you have just reduced your estate by $90,000, no taxable gifts have been made. In each succeeding year, you repeat this process. Thus, in ten years, you will have managed to remove almost 90% of the value of the partnership from your estate, at zero gift tax cost. Non-tax advantages Although you may have given away 90% of the value of the partnership, you are still the general partner, so you continue to control the management and investment of the business and all distributions of cash or other property. In addition:
By transferring the partnership interests at today’s values, you have effectively “frozen” the estate tax values. Even if the total value of the partnership greatly increases after you have made the gifts, this future appreciation escapes both gift and estate tax. You have achieved significant gift tax discounts, based on lack of marketability and lack of control (of the limited partnership interests). Income can be split among family members based on their percentage of ownership. Overall income tax savings can result to the extent the children are in lower income tax brackets. The gifts to children will qualify for the $12,000/$24,000 annual gift tax exclusions. You will avoid the complexity of “Crummey” withdrawal rights used in irrevocable trusts. However, although the child owns the interest outright, as a practical matter the child can’t do anything with the interest. Funding the FLP You can transfer business interests, cash, marketable securities, real estate, stock of a C (but not an S) corporation, farm and timberland (but this may cause loss of subsidy), even life insurance policies. However, be aware that there may be income tax results upon funding that must be considered. Conclusion: The above discussion shows some of the advantages of the FLP. The concept has been greatly simplified, and there are many tax and other implications not fully discussed. However, it is one of the best vehicles for transferring wealth down to a lower generation, and it deserves serious consideration by anyone whose estate may someday be subject to the estate tax. |
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Boulder ElderLaw
Law Office of K. Gabriel Heiser 4845 Pearl East Circle, Suite 101 Boulder, CO 80301 Ph:(303) 447-6855 fax: (888) 301-9466 
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