Home Add to Favorite Contact Submit  
             02 November, 2024
 

    
Category:  Articles » Finances » Estate-Plan-Trusts

 

Family Limited Partnership-Abusive Tax-Free Wealth Transfer

Popularity:
         Views: 2270
2007-04-09 12:49:37     
Article by Rocco Beatrice

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 Trustâ„¢. 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?

Specialized in: Family Limited Partnership-abusive
Print article      Bookmark this page
Related Articles 
The Practical Workings of Trust Funds (Popularity: ): You've heard about people using trust funds for everything from handling their affairs while they travel to providing for orderly distributions to heirs when they pass away. So, just how do these funds work?Parents often wonder how to provide for their children when they grow older, and one of the best ways to do so is to set up a trust fund. A trust is a logical step for those ...
A Joint Tenancy Is Where Two Persons Co-Own A Property (Popularity: ): A Joint Tenancy is where you and another person co-own or cohabitate the same property. Joint Tenancy also refers to where a married couple owns a home or property together. You might also want to know that a Joint Tenancy can have more than two people who own the property. The only stipulation to this is that no matter how many people own the property, they all own equal parts. ...
Powers Of Attorney Vs. Successor Trustees - Does One Have More Power Than The Other (Popularity: ): Question: I am listed as the Successor trustee, my bother is listed as the Durable Power of Attorney for property management of my father's estate. Does one have more power than the other. Does the POA have the power to sell my dad's property or do I the successor? Thanks ahead of time - really confused. N.H.Answer: Dear N.H. - Generally speaking, you can have as much power under a ...
Joint Tenancy, a Will or a Trust? What's the Best Way to Plan Your Estate? (Popularity: ): estate plan for you if you don’t have your own,” is preferable to creating your own estate plan.The problem is that newspapers, magazines, and other media often present conflicting views on whether it is best to choose joint tenancy, a will or a trust as your estate planning vehicle. Who’s telling the truth?Let’s take a look at the three fundamental goals of an effective estate plan:(1) Transferring your property to ...
Sometimes a Conservator can be a Good Thing! (Popularity: ): The thought of having a conservator appointed for a parent or relative - even a friend or neighbor - is something we all seem to loath. It has all sorts of negative connotations, including the fact that a conserved individual will be paraded through the probate courts with psychiatric and medical evaluations open for all to see. But, most of all, it's the loss of dignity that results when the ...


Related Business 
Wealth & Tax Management (Popularity: ): Wealth and Tax Management, an independent financial planning specialist. We offer an array of practical wealth-building solutions for business owners and individuals who are aspiring to become financially secure or protect and increase their current wealth. Building strong and long-lasting client relationships, and understanding their different needs, lifestyles and wealth aspirations is at the heart of everything we do.
Indian income tax (Popularity: ): Our 'India Tax System' section deals with all rules and regulations related to India tax structure including but not limited to income tax, wealth tax, service tax, gifts, salary, perquisites, retirement benefits, capital gains, house property, TDS and all related deductions. We also provide information on where and how much money you can save by investing.
Twenty-First Century Computer Systems (Popularity: ): Property management software for hotels, motels and resorts. Includes reservations, check in, check out and night auditing. Limited partnership administration software for real estate investment trusts (REIT) and other limited partnership organizations to calculate partners distributions and print tax schedule K-1's.
Partnership Profiles (Popularity: ): Online business valuation publications specializing in Family Limited Partnership valuation and minority interest discounts for Real Estate Partnerships, with historical partnership valuation data back to 1993.
Tax Savers Direct (Popularity: ): Accountants and tax advisers based in Bristol, Gloucestershire and Somerset. We specialise in pro active tax advice and planning. Tax returns, Overseas tax advice, Seamans tax advice, capital gains tax, inheritance tax, limited company accounts, sub contractor accounts, landlords tax advice and accounts, farm accounts and limited company formation.
The Wealth Academy (Popularity: ): Help for the Business of Your Life includes free downloadable newspaper articles on mortgage strategies, debt management, wealth creation, tax savvy strategies, and estate planning. Archived copyrighted content posted by mortgage and financial experts for free distribution.
Indiataxes.com (Popularity: ): General information about taxation that covers income tax, TDS, sales tax, service tax, and wealth tax. Provides sales tax software and form downloads.
Cash For Your Pension (Popularity: ): We can assist you to get tax free cash for your UK pension, irregardless of how old you are. This process has been in place in one form or another for the last 17 years using recognised methods and standard UK pension transfer legislation. With the help of an Umbrella Pension Trust we can help you release or cash in up to 85% of the value of your UK pension ...
Asset & Wealth Management (Popularity: ): Established in 1997, Bond Wealth Management is a wealth management firm located in Long Beach, CA. Our mission is to advise our clients to make the best decisions regarding their desire to accumulate, protect and transfer their wealth. We work hard to understand our client’s needs and concerns while being committed to providing exceptional client service.
Equity Release through Age Partnership (Popularity: ): Equity Release through Age Partnership. Release the equity from your home with one tax free lump sum or receive monthly payments for a more comfortable retirement. See if you qualify for equity release through Age Partnership.