Gifts of limited partnership interests to your children can generate substantial valuation discounts because they are minority interests and lack of marketability reduces their value. Furthermore, these minority interest gifts can be made gift tax free if under the annual exclusion amount ($13,000 for single filers, $26,000 for joint filers in 2009).
Gifts that qualify for the annual exclusion will not reduce your lifetime exemption and are excluded from your estate. Furthermore, you can give away up to $1 million during your lifetime tax free ($2 million for a couple), but doing so will reduce the amount you are able to transfer estate tax free at death. FLPs also provide a measure of asset protection because once assets are transferred to an FLP, the limited partners own partnership interests rather than the specific assets themselves.
In California, the only remedy available to a creditor against a partnership interest is in the form of a charging order by a court. The charging order limits a creditor’s interest against a partner to distributions of income and principal made from the partnership. Income of the FLP “passes through” to the partners and are taxed as ordinary income, capital gains, etc.
While there are many advantages to FLPs there are expenses for establishing and maintaining an FLP, retained partnership interests appreciate in your estate until transferred, and gifts do not receive a step-up in basis. As you can see, FLPs are complex and proper planning is essential.
Posted by Henry Moravec, III. Any questions or comments should be directed to: hm@moravecslaw.com or (626) 793-3210. The firm website is http://www.moravecslaw.com/
