Family limited partnerships, one such traditional limited partnership,
have been over marketed as wealth transfer devises. Family limited
partnerships are red flags for the Internal Revenue Service as abusive
tax-free wealth transfers. Family partnerships have been widely
propagated as the devise of choice for transferring the family business
and other highly appreciated assets tax-free from parents to their
children.
Different programs are available to transfer ownership and the
management of a family business. The Family limited partnership is
nothing more than the traditional partnership for which "only family
members" can be partners as either general partners or limited partners.
Did you know that general partners of family partnerships are exposed
to frivolous lawsuits, court judgments, and creditor seizures? The
problem is avoided if an irrevocable trust (not a revocable trust) is
used as the general partner of your family limited partnership.
HOW DOES THE FAMILY LIMITED PARTNERSHIP WORK?
The older generation (i.e. parents) become owners with 2% stake in the
business and thereby establish themselves as general partners in a
family limited partnership. Over a period of time, by gifting limited
partnership interests, the younger generation (i.e. children) end up as
limited partners with a 98% stake in the business. This all sounds
wonderful and an almost ideal tax deferral strategy. But is there a
catch to all of this great tax-free wealth transfer and strategy?
GIFTING TO THE YOUNGER GENERATION WITH A FAMILY LIMITED PARTNERSHIP
The result is highly appreciated assets are transferred from the estate
of the parents to the children presumably tax-free. When carefully and
properly implemented the family limited partnership is a useful tool.
But there are better ways to achieve a significantly more efficient
transfer of wealth.
Did you know the IRS considers these family limited partnership
arrangements abusive when overzealous practitioners over claim two
commonly used discounts in the valuation of underlying (highly
appreciated) assets in estate tax valuations? The IRS comes down
significantly hard, when these arrangements are made over a deathbed
especially in the hours or days before death. Please note that there's
an increasing congressional opposition to the use of family limited
partnerships.
TWO DISCOUNT ESTATE TAX VALUATIONS OF UNDERLYING ASSETS IN FAMILY PARTNERSHIPS ARE:
1. Lack of marketability discounting which is typically 15% to 35%
reduced estate tax valuation due to a limited market for the business
or the assets, if sold.
2. Limited minority interest discounting which is typically an
additional 15% to 35% reduced estate tax valuation to the minority
position (lack of control) in the business or underlying assets.
Combined, these two discounts can amount up to 70% or more. But how much is too much?
DISADVANTAGES OF FAMILY LIMITED PARTNERSHIPS:
1. Gifted property does NOT receive the "stepped-up" basis treatment
that bequeathed property receives. Therefore the children, who have
received "gifted partnership interests" may face unexpected capital
gains tax liability.
If discounting is reasonably and carefully applied, it's a significant
tax saving devise. Keeping in mind that it's great for the parents, not
so good for the children because of the unexpected capital gains tax
liability that can be imposed on the children.
2. General partners are not insulated from potential lawsuits,
judgments, or creditor seizures. This problem can be avoided if the
general partner is the Ultra Trust™. The parents as general partners
are 100% in control of the assets and 100% responsible for a potential
lawsuit. General partners will have no asset protection in these cases.
FAMILY BUSINESS SUCCESSION ESTATE PLANNING:
If you have an interest in family business succession planning, there
are several financially-engineered devises addressing the following
important issues:
- Ownership of family business - Which of the family members will
become the future owners of the business? What method or combination of
methods is the most effective in consideration of asset protection and
wealth preservation, elimination of probate, deferral of capital gains
taxes, elimination of estate taxes, and reduction of taxes on earned
income or possibly eliminate income taxes.
- Control of your family business - Which of the family members will
become the future managers. Not all family members have management
skills. Some family members should have voting control, while others
must become silent partners.
- Dispute resolution - How will family members deal with potential
disputes? What mechanism is fair to controlling and non-controlling
family members?
- Employment - Which family members will be employed by the business?
Rocco and his team of bonded professional attorneys, CPAs and
accountants help affluent individuals and companies retain control of
their domestic and foreign/offshore assets, protect their assets, build
& preserve their wealth and financially structure their money to
reduce capital gains taxes, estate taxes, inheritance taxes, avoid the
probate process and decrease income taxes.
--------------------------------------------------------------------------------
Rocco Beatrice, CPA, MST, MBA, Award-winning trust & estate-planning expert
71 Commercial Street #150 Boston, MA 02109 tel: 508.429.0011 fax: 508.429.3034
Click here for more info: http://www.UltraTrust.com, http://ultratrust.com/hide-your-assets-now.html
Disclaimer: All information on this site is provided for informational purposes only! By no means is any
information presented herein intended to substitute for the advice provided to you by any health care or other professional
or organization.
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