Innovative approach protects LP's assets

Limited partnerships have been used by estate planners for several years to assist clients in transferring assets at the lowest tax cost.

However, some clients may not wish to transfer assets to children if they will lose control over the ultimate disposition of the income and principal.

An innovative approach may make it possible for these clients to obtain the tax advantages of the limited partnership discounting for gifting without losing all control.

A client with a large estate may wish to pass some assets during his or her lifetime to reduce the amount of estate taxes to be paid. Because a single person may gift only $10,000 to a person in any one year without incurring a gift tax, a transfer in excess of that amount will trigger a gift tax.

If the donor has not used his or her unified credit, which is currently

$650,000, the excess will simply reduce the amount of the credit that may be used by the estate after death.

For example, a person could gift $250,000 to a son or daughter directly, and assuming the donor had not used any of the unified credit, the gift tax of $240,000 would come off the $650,000 available, leaving a balance of $410,000 to be used either during life or upon death.

Instead of making that $250,000 gift outright to a child, the donor may choose to place an asset or several assets in a limited partnership and gift not the cash or asset itself, but rather a limited partnership interest in the limited partnership.

Gifts of partnership interests are valued for gift tax purposes in a different manner than asset transfers made outright to an individual.

Such gifts are discounted because the recipient takes a limited partnership interest which cannot be sold, pledged, transferred or otherwise liquidated.

As a result, the value of the gift is discounted for the lack of control and the lack of marketability of that limited partnership interest.

The interest in a limited partnership of an amount equal to $250,000, may thus be valued at $150,000 for gift-tax purposes.

In this way, the donor can leverage the unified credit and transfer more assets than could be transferred directly.

The issue that sometimes arises for the client making the gift of the limited partnership interest is that the recipient, often the child, may ultimately make disposition of the limited partnership interest when distribution of the assets occurs.

The child may then make any transfer of the property that he or she desires.

In order to retain some control over the final disposition of property contained in the limited partnership, the donor may decide to gift one or more children's shares into an irrevocable trust, which provides for ultimate disposition of the property.

Since the trust is irrevocable, the assets are out of the estate of the donor, but there is some control remaining.

The donor may, for example, draft the trust to pay income to the child during the child's lifetime, and then pay the principal remaining thereafter to the grandchildren.

In this way, a parent may be able to make a transfer that he or she would otherwise be reluctant to make, thereby reducing the amount of estate taxes that will be due to the government upon death.

(Stephen F. Aton is a Springfield attorney practicing in the areas of corporate law, and taxation and estate planning.)

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