Magazine article The CPA Journal

Gifting Limited Partnership Interests: Are Annual Exclusions Available?

Magazine article The CPA Journal

Gifting Limited Partnership Interests: Are Annual Exclusions Available?

Article excerpt

THE ANNUAL GIFT TAX EXCLUSION may be insignificant compared to the entire value of the partnership.

or the last few years, one of the most common wealth preservation techniques has been gifts of interests in limited partnerships. In addition to valuation discounts for gifts of minority interests and lack of marketability, the taxexclusive nature of the gift tax as opposed to the tax-inclusive nature of the estate tax can lead to significant tax savings. Furthermore, state partnership law allows asset protection features.

Until recently, both commentators and the IRS appeared to be in agreement that another benefit would be available. Specifically, a gift of a limited partnership interest would entitle the transferor to the $10,000 annual gift tax exclusion. In Technical Advice Memorandum (TAM) 9751003, an agent asked whether "the gifts of limited partnership interests made by the donor qualify for the annual exclusion provided for in IRC section 2503(b)." Should the answer be "no," most of the transfer tax benefits of limited partnership benefits would remain. However, many taxpayers may rethink whether they should proceed with the formation of a limited partnership. On a very practical level, the mechanics in the preparation of gift tax returns (including the need to amend prior returns) would change.

The fact pattern of the TAM was based upon a childless widow who transferred limited partnership interests to various family members. The partnership's underlying assets were industrial buildings. An S corporation with the widow as the sole shareholder became the general partner. Five of the limited partnership inter est donees assigned their interests to three other donees. Subsequently, an additional capital contribution allowed the partnership to purchase a tract of land. Then, the widow transferred 35 limited partnership interests to relatives who were minors. After all the transfers, the S corporation owned a five percent general partnership interest and various family members owned 95% limited partnership interests.

The limited partnership agreement had certain clauses, which differed from "boilerplate" agreements. The general partner was provided with authority to retain funds in the partnership "for any other reason whatsoever." Assignments or transfers of limited partnership interests would be void ab initio. Furthermore, for a limited partnership assignee to become a "substitute limited partner," several conditions in excess of state requirements had to be met.

An initial question is whether the clause granting the general partner authority over funds allows a transfer of a limited partnership interest to be a complete, inter vivos gift. Does the clause mean that the general partner would not have a fiduciary responsibility to look out for the interest of the limited partners? If the answer is yes, then the annual gift tax exclusion issue may be insignificant compared to whether the taxable estate of a general partner (or in this case, the estate of the sole shareholder of the general partner) would include the entire value of the partnership. Has the general partner given anything away?

A second concern is whether an argument can be made that this fact pattern is really a conditional inter vivos transfer, the value of which will only be known in the future. That is, what does the assignee actually own? To make matters worse, the general partner is a corporation, which has unlimited life under state statute. The uncertainty as to when the transfer will become complete can continue forever. Perhaps, a testamentary transfer has taken place. If the transfer is testamentary, then the benefit of a family limited partnership as an estate tax planning tool might be lost.

Accordingly, it is very understandable why the examining agent asked his question to the IRS national office. In fact, one may wonder why he did not ask if a completed gift had actually occurred. …

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