Why I Should Form a Family Limited Partnership

Basic Strategy
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

  1. avoid potential abuses by the general partner;
  2. address when distributions from the partnership bank account should be made;
  3. 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

What Is Income In Respect To Decedent (IRD) Estate Tax Deduction?

Income In Respect To Decedent (IRD) Defined

Income in respect of a decedent (IRD) is income earned by the decedent (deceased person) prior to his death but was payable or paid after his death. Income in Respect to Decedent includes the taxable portions of annuities, traditional IRAs and tax deferred retirement plans, Series EE U.S. Savings Bonds, installment agreements, partnership income, rent, wages, bonuses and vacation time paid after death. It also includes interest and dividends earned on stocks, bonds or mutual funds in the decedent’s name while he was alive, but paid after his death.

How is IRD Reported

Often you will have to add the item to the final 1040 federal tax return of the decedent because the social security number on the tax document such as a W-2, 1099 or K-1 will be the decedent’s. Once the estate is probated the executor can retitle the retirement plans, EE U.S. Savings Bonds or other asset to the estate or beneficiaries name and tax identification number so it can be included on the return of the person or entity receiving the income.

If no beneficiary is named such as the surviving spouse, it passes to the estate, and passes by will. If the decedent did not have a will it passes by intestate law.

How Is IRD Taxed

IRD retains the same tax nature after death as it would have had if the decedent had received the item of income while alive. There is no step-up in basis for IRD items because the income was never taxed during the decedent’s life.

The IRD Estate Tax Deduction

One of the most missed deductions available to recipients of IRD is the federal estate tax deduction attributable to the IRD items. Since the amount was earned while the decedent was alive and owed to the decedent at the date of death, it is an asset of the estate. If the estate owes federal estate tax, some of it is attributable to the IRD items. When the ultimate recipient receives the items of IRD, the recipient must include these in income and pay income tax on their respective federal 1040 tax return in the year received. Thus items of IRD are potentially taxed twice, once on the federal 706 Estate Tax return and again on the recipient’s federal 1040 tax return.

The IRD estate tax deduction is calculated by re-computing the 706 without any of the items of IRD, then subtracting this number from the true federal estate transfer tax bill which includes the IRD items. This difference is the estate tax due to the IRD items. A proportionate amount of this may be deducted on the recipient’s 1040 federal tax return, by the recipient as they realize the income from the IRD item. For example, someone collecting from a deceased person’s 401(k) or traditional IRA would have a deduction of the federal estate tax on that portion of the decedent’s assets, recovered over time in the year the income was received.

If you have any questions about IRD feel free to call Gregory J. Spadea at Spadea & Associates, LLC in Ridley Park, Pennsylvania at 610-521-0604.

Welcome to the Law Offices of Spadea & Associates

At the law offices of Spadea & Associates, LLC, in Ridley Park, we have extensive experience representing individuals throughout Delaware County, Montgomery County, Philadelphia County and South Jersey. We place a high priority on personal service, ensuring that all your legal concerns are handled directly by Gregory J. Spadea or one of his associates. Before starting his own law practice in 2001, attorney Spadea was a former IRS agent and certified public accountant. Contact our offices to set up a free initial consultation.

We focus our practice on several areas of practice, including:

• Estate and tax planning: We provide advice to individuals and businesses, counseling clients and families on strategies to ensure the orderly distribution of assets at death. We also help businesses and individuals make plans to minimize their income and inheritance tax obligations.
• Estate administration and will probate: We guide you through the probate and estate administration process in as seamless a manner as possible, ensuring your responsibilities are met appropriately.
• Business law and entity formation: We work with startups to identify appropriate business structure and provide comprehensive corporate governance. We draft and review contracts and commercial leases.
• Criminal defense: Our criminal defense attorneys represent men and women who have been charged with a crime. We offer skilled criminal defense services to people charged with white collar crimes, felonies, misdemeanors, DUI (driving under the influence) and traffic violations.
• Real estate transactions and evictions: We handle all matters related to the sale or purchase of commercial or residential real estate, from the negotiation of terms to the closing. We prepare all documents necessary to successfully complete a real estate transaction, including buy-sell agreements and deeds.
• Personal injury: Our firm represents injured individuals and families in a wide range of personal injury cases, including car accidents, truck accidents, motorcycle crashes, medical malpractice, slip-and- fall and wrongful death, among others.
• Family law: We work closely with clients to deal with family law issues as efficiently and effectively as possible. Some of the types of family law cases we handle include divorce, child support, child custody, property division and spousal support.
• Immigration law: Our attorneys are mindful of the timeframes of immigration processes as we help our clients come to the United States for work, obtain lawful permanent resident status and work toward other immigration goals.

For a free initial consultation with an experienced lawyer, contact us. We are conveniently located across from Taylor Hospital.

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