How to Transfer Wealth, Avoid Estate Taxes, and Maintain Con

By Secemski, Ken | The CPA Journal, March 1995 | Go to article overview

How to Transfer Wealth, Avoid Estate Taxes, and Maintain Con


Secemski, Ken, The CPA Journal


Family Limited Partnerships (FLPs) are effective estate planning vehicles through which taxpayers can transfer wealth, avoid estate tax, and still maintain control of their assets. Husbands and wives who have more than $1.2 million in assets and are planning to transfer wealth to family members, may want to consider establishing a FLP.

A FLP can be funded with virtually any asset (however, a partnership cannot be a shareholder of an S corporation). However, as a general rule, FLPs are funded with cash, marketable securities, investment real estate, and, under certain circumstances, closely held business interests.

How does a FLP work? In its simplest form, a husband and wife establish a FLP and name themselves general partners, each with a 1% interest. At the onset, the husband and wife wiLl also be the sole limited partners, owning the remaining 98%. The husband and wife then transfer assets into the FLP.

Next, the husband and wife make gifts of limited partnership interests to family members, usually children and grandchildren. The transfer of interests can be done all at once or over a period of time. If done over time, gifts of $20,000 would be made annually to make use of the annual exclusion and avoid triggering gift tax. It may be advisable to gift most, if not all, of the limited partnership interests immediately or over a short period of time, if it is believed that the partnership assets will appreciate quickly. Should that be the case, the parents will use some, if not all, of their lifetime exemption ($600,000 each) to avoid paying any Federal gift tax now.

As long as the husband and wife are general partners, they make all the decisions regarding the assets in the FLP. Thus, even if other family members own 98% of the limited partnership, the parents still make all decisions due to their 2% general partnership interest. This includes decisions regarding if and when partnership distributions should be made, how partnership assets should be invested, and whether the general partner should be paid management fees or a salary. In addition, since general partners maintain control, gifts to family members can be made outright, avoiding the usual need to establish trusts to hold the gifted assets. (Of course, restrictions on transfers of the partnership interests must be written into the partnership agreement.)

FLPs are an attractive way to transfer wealth because of their effectiveness in depressing transfer tax values. Because it involves gifting nonmarketable and minority interests in the FLP, there is justification to discount the value of these gifts for gift tax purposes. …

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