Each individual is going to be in a completely unique situation when it comes to estate planning. There is no universal estate plan that is perfect for everyone because different circumstances call for different courses of action.
For example, the federal estate tax exclusion is $5.25 million in 2013. If your assets do not exceed this amount you have no reason to position them in a way that would protect them from the federal estate tax. On the other hand, if you are exposed you would want to speak with an estate planning lawyer about estate tax efficiency strategies.
In Indiana, if you were in fact exposed to the estate tax you might want to consider creating a family limited partnership. These devices can enable asset transfers within the family at a tax discount.
Before we provide a basic explanation we should explain a bit about the gift tax. There is a gift tax in place that is unified with the federal estate tax. As a result, if you give large gifts while you are still alive they are taxable. The gift tax and the estate tax are unified, and they both carry a 40% top rate.
Now let’s get back to the family limited partnership in Indiana and its value as a tax efficiency structure. You are the general partner when you create the family limited partnership. You as the general partner have absolute control of the property that you placed into the partnership.
Family members can become limited partners at your discretion. They have absolutely no decision-making authority. They can’t market or otherwise access anything that has been placed into the family limited partnership, even though they may own shares.
When you give shares in the partnership to family members these gifts would potentially be subject to the federal gift tax. However, the taxable value of the shares will be less than the fair market value because the limited partners do not have any control of the assets.
Family limited partnerships can also be useful for people who are looking for asset protection. This can typically include landlords and physicians, but anyone with deep pockets would do well to protect their assets.
When you convey property into a family limited partnership this property could not be attached by creditors and claimants. It is possible that distributions of profit could be attached through the issuance of a charging order, but the general partner doesn’t have to take distributions. However, the person holding the charging order could be forced to pay taxes on income from distributions that he or she never actually received.
You do have to make sure that you create the family limited partnership in Indiana in advance of any legal actions being taken against you to avoid charges of fraudulent conveyance.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.