Maroko and Landau, A Professional Corporation
Attorneys and Counselors Eli Maroko Mark G. Landau, L.L.M. Gary Schwarcz, L.L.M.* ――――――― Ellen Donnelly Alisa A. Peskin-Shepherd† Jeffrey R. Sharp Patricia J. Sullivan Ilene Bloom Wolf Julianne M. Cassin Bruce M. Komisar
Legal Assistant
Protecting Your Estate With Family Limited Partnerships
by Mark G. Landau
Suite 214 32255 Northwestern Highway Farmington Hills, Michigan 48334-1573 Telephone (248) 855-8808 Fax (248) 855-8809 www.marokoandlandau.com
*Also Admitted in New York
† Also Admitted in New Jersey
and Pennsylvania
Betsy Snider Heuer
Creating a Family Limited Partnership is an attractive estate planning strategy for transferring assets to your family while maintaining control. Family Limited Partnerships generally are structured with you as the general partner and your beneficiaries (typically, children and grandchildren, or trusts for children or grandchildren) as limited partners. In order to create the partnership, you would initially transfer assets to the entity. You would then gift limited partnership interests to your beneficiaries, rather than giving cash. The benefits are as follows: 1. Control. As a general partner, you control the operation of the partnership. If investments fund the partnership, you control the investments. If the partnership is funded with real estate, you control the real estate. 2. Additional Amounts Excluded from Estate. Gifts of limited partnership interests are an advantageous way of transferring your estate (compared to gifts of cash) because the IRS permits a discount (assume 25%) in valuing the gift. The discount results because the transferred limited partnership interest is not considered to be readily marketable and represents a minority non controlling interest in the partnership. Tax laws permit you to transfer up to $10,000 per person per year without gift tax consequences. Due to the discount, you may then transfer more out of your estate using a family partnership when compared to gifts of cash. For example, assume you desire to transfer $10,000 to 5 beneficiaries each year for 10 years. After 10 years of cash gifts, the amount excluded from your estate would be $500,000 ($10,000 x 5 beneficiaries = $50,000 per year x 10 years = $500,000).
If, on the other hand, you created a family limited partnership and transferred partnership interests rather than cash, you would be able to transfer approximately $650,000 (rather than $500,000) from your estate due to the 25% discount. The $650,000 transferred partnership interests would have a tax value of only $500,000 after applying the 25% discount ($650,000 - (25% of $650,000) = $500,000). As a result, the total tax savings (in a 50% estate tax bracket) transferring partnership interests would be $325,000 ($650,000 x 50% = $325,000) when compared to a $250,000 tax savings transferring cash ($500,000 x 50% = $250,000). The additional tax savings using partnerships would be $75,000 as indicated in the following chart: AMOUNT TRANSFERRED Partnerships: $650,0001 Cash Gifts: $500,000 TAX SAVINGS $325,0002 $250,0002 $ 75,000 Additional Tax Savings With Partnerships
NOTES: 1. With a 25% discount, the actual amount is $487,500 ($650,000 - 25% discount = $487,500). 2. The tax savings assumes a 50% estate tax bracket
3. Income Tax Savings. The family limited partnership reduces overall income tax liability. Rather than taxing all the income on your tax return, since there are multiple taxpayers (the other partners), the income is spread among the other taxpayers. 4. Appreciation Removed. If an appreciating asset is used to fund the partnership (real estate), the appreciation is removed from your estate. For example, if the value of the real estate increased by $100,000 and you transferred 40% of the partnership to your family, $40,000 of the appreciation ($100,000 appreciation x 40% transferred interests = $40,000) would be excluded from your estate. In a 50% tax bracket, the additional tax savings is $20,000 ($40,000 x 50% = $20,000). 5. Retained Income. While the general rule is that you must relinquish the income allocated to the gifted interests, you are permitted to receive compensation for services rendered on behalf of the partnership. As a result, you would be able to receive income earned beyond your retained interest. For example, assume the family limited partnership earned $50,000 a year. You retained a 90% interest in the partnership and gifted a 10% interest. Your prorata share of the income would be $45,000 (90% retained x $50,000 income = $45,000).
6. By providing services to the family partnership, you would be able to receive additional income beyond your $45,000 prorata share. 7. Asset Protection. A family limited partnership protects the partnership assets from the creditors of the limited partners. A creditor of a limited partner would not be likely to attach a limited partnership interest since distributions would be made to the limited partner only when and if you, as the general partner, decide to make such distributions. CONCLUSION The Family Limited Partnership is an attractive vehicle to control your assets while reducing estate and income taxes. When structured properly, the Family Limited Partnership provides a substantial amount of flexibility when transferring assets to your family. If you would like to discuss the contents of this letter in more detail, please contact Mark G. Landau or Gary Schwarcz of our firm.