Taxation can take its toll when you are attempting to transfer assets to your loved ones both during your life and after your passing. While it makes sense that you could choose to simply give gifts to your family members while you are still alive, you do have to contend with the gift tax if you choose to go this route.
The gift tax carries the same 35% rate as the estate tax right now, but the maximum rate of both of these taxes is scheduled to rise to 55% in 2013. Though there is a lifetime gift tax exemption of $5 million at the present time, it is unified with the estate tax exclusion. So your available estate tax exclusion is going to be reduced by the value of any gifts that you give using the lifetime exemption.
The above makes it necessary to implement strategies that provide tax efficiency. One of these would involve the creation of a family limited partnership.
To explain by way of example, let’s say that your total assets were well in excess of the exclusion amount. You want to give at least $1 million to each of your two children. If you give these gifts directly the entire amount is going to be subject to the gift tax.
As a response you could create a family limited partnership. You act as the general partner and your two children are limited partners. You place say $4 million of real estate into the partnership and give each of your children a 25% share. The taxable value of the shares is not $1 million though it may seem to be so on the surface.
The limited partner has no ability to market or control his or her share. It is up to the general partner to allow for distributions and none could be forthcoming for years. As a result, no hypothetical buyer would pay $1 million for a 25% share in a partnership over which he or she has no control. The IRS considers this fair market value when calculating the taxable amount of the gift, and tax savings are realized in this manner.
The above is just one of the benefits of a family limited partnership. To learn more, simply pick up the phone and arrange for a consultation with a licensed legacy planning attorney.
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.