Transfer of Limited Partnership Interest
Transfer of limited partnership interest is allowed as long as the general partner consents to the arrangement.3 min read
2. What Is the Structure of a Limited Partnership?
3. What Are the Benefits of a Limited Partnership?
4. What Other Structures Can Be Used For Your Family Business?
5. What Is the Stance of the Tax Court on Interest Transfers?
Transfer of limited partnership interest is allowed as long as the general partner consents to the arrangement and it is done in concert with the established partnership agreement. A common example of a limited partnership is the family limited partnership, which is often created to administer a family business.
What Is a Limited Partnership?
Two or more individuals that are starting a business together can do so by creating a limited partnership agreement. This document establishes guidelines for dividing income, interest, and control of the business. This can also be created as a holding company for investments, real estate, or other assets.
What Is the Structure of a Limited Partnership?
In most cases, this entity is formed by creating a partnership that has both general and limited interests. Limited partners share in the profits but do not have control over management of the business. For example, in a family business, the parents may act as the general partners while children are designated as limited partners.
What Are the Benefits of a Limited Partnership?
Family limited partnerships are common because they allow parents to transfer ownership interest to their children gradually.
- This allows parents to assess their ability to manage the business while lowering estate tax liability by removing the limited partnership shares from the estate.
- Any interest in the business transferred to your children during your lifetime will not be taxed as part of your estate when you die.
- Limited partnership interests can be transferred gradually and systemically over time.
- This optimizes your ability to exclude $15,000 in gifts from income tax, which increases to $30,000 if you are married filing jointly. This exclusion will also be adjusted for inflation.
- The taxable amount of a gift can be further reduced by up to 30 percent if the partnership is made for a legitimate business reason beyond the tax advantages.
- You may also be able to take advantage of income tax benefits with this arrangement. However, children younger than age 14 are subject to so-called "kiddie tax."
What Other Structures Can Be Used For Your Family Business?
With a family partnership, all the partners have a role in managing the day-to-day operations of the business. However, some family members can have more extensive involvement than others. Income shares must be divided in proportion to the business services provided. A minor cannot act as a partner in this type of arrangement unless someone else controls the interest on his or her behalf.
An investment partnership is designed to hold securities that are expected to increase in value, such as real estate and securities. A limited family partnership can also be an investment partnership, but property transfers will be subject to gains and losses (which is not the case for a non-investment partnership).
What Is the Stance of the Tax Court on Interest Transfers?
In 2010, the Tax Court issued a memo indicating that for a gift to qualify for annual tax exclusion, it must be able to be possessed, enjoyed, and used by the recipient immediately without restrictions. This is called the present interest rule.
This was based on a 2002 IRS ruling finding that transfers to children were considered future interests because they were prevented by the partnership agreement from transferring and assigning partnership interests and from withdrawing capital contributions.
The taxpayer must show that income will be generated by the gift immediately after it is given and that the recipients will receive a steady income flow. For example, gifted real property that generates income through lease payments does not qualify because it will not necessarily create ongoing and dependable income.
A family limited partnership can either rewrite its operating agreement or partnership agreement to allow all partners unlimited ability to transfer their interests to third parties. You can also allow the gift recipient a limited-time power to withdraw income or principal in combination with annual gifts.
If you do not want to allow limited partners unlimited power to transfer membership interests, consider structuring the agreement to allow right of first refusal to qualify for the gift exclusion. Have a qualified estate tax attorney review your partnership agreement to ensure eligibility.
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