The estate planning strategy employed by business owners is to gift limited partnership interests to family members at a discount based on their future business succession plan. This works well for succession planning because a business owner that has a successful LLC can gift the nonvoting LLC units to his children and out of his estate over time. The business owner acts as a general partner and his children are limited partners. In addition all the assets transferred to the Family Limited Partnership are protected from business creditors.
Gifting to the Limited Partnership
The general partner (business owner) can gift the limited partnership interests up to the annual exclusion of $13,000 in 2012 without filing a form 709 federal gift tax return. If the business owner wants to gift more than $13,000 per person he has to file a Form 709 return and may use part of his $5.12 million exemption in 2012. However, the value of the limited partnership shares or nonvoting LLC units may be discounted up to 30% due to their lack of marketability since there is no ready or available market to sell those shares on.
Tips on Surviving an IRS Challenge
In order for the Family Limited Partnership to survive a challenge by the Internal Revenue Service the general partner (business owner) must resist the temptation to maintain too much control over the partnership assets. The general partner should not pay personal expenses from the partnership bank account or comingle his personal funds with the partnership funds. The partnership should be operated as a separate entity and hold annual meetings to discuss management issues.
The partnership agreement should be drafted to
- avoid potential abuses by the general partner;
- address when distributions from the partnership bank account should be made;
- state at least three nontax reasons indicating why the partnership was formed such as:
- To make a profit.
- To increase the family’s wealth
- To provide a means whereby family members can become more knowledgeable about the management and preservation of the family’s assets.*
If you have any questions about Family limited partnerships please call Gregory J. Spadea of Spadea & Associates, LLC in Ridley Park, PA at 610-521-0604.
*Estate of Turner, TC Memo 2011-209