When you are planning your estate you must gain estate tax efficiency if your assets exceed a certain amount.
There are various different legal devices that can be utilized to provide estate tax efficiency. The one that we would like to look at in this post is the family limited partnership.
A family limited partnership is comprised of a general partner and limited partners. All the participants in the partnership must be members of the same family.
The estate tax is unified with the gift tax, and both taxes carry a 40% maximum rate. So, if you try to give away everything while you are still alive to avoid the estate tax it won’t work. There is a $5.25 million unified exclusion in place, and it applies to taxable gifts and the value of your estate.
If you have more than this amount to give to your heirs the portion that exceeds $5.25 million would be taxable unless you take steps to gain estate tax efficiency.
Let’s say that there are $60 million of assets held in the partnership. You have three children and they are your limited partners. You give each of them a 25% share in the partnership.
When you do the simple math 25% of $60 million is $15 million. In a way you are giving gifts to each of your children that have a real value of $15 million. However, they don’t have any control of the 25% shares that you are giving them. If you as the general partner were to make bad investments the 25% share could someday become worthless.
Even if the assets are managed well, you don’t have to distribute anything to the general partners, and they have no way of extracting anything unless you agree to make distributions.
Because of this lack of control the value of the gifts for gift tax purposes is less than its true fair market value when they are given.
In addition to this estate tax efficiency family limited partnerships also provide asset protection because creditors and claimants cannot touch resources that have been placed into the family limited partnership. This is a very appealing aspect because we do in fact live in a litigious society. There are those who like to target individuals who have been able to accumulate a significant store of wealth because there is actually something there to attach.
Family limited partnerships can satisfy two very important objectives at the same time. This is just a very basic explanation of their value. If you are interested in learning about these very useful legal devices in more detail don’t hesitate to contact our firm to schedule a free wealth preservation consultation.
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Ryan M. DenmanandDennis D. Duffy
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