Overview of Reducing your Estate Taxes
The ability of the limited partnership to reduce estate taxes is its most
formidable tax benefit. Assume that an individual has, upon his death,
cash in the amount of $3 million and the estate tax exemption is $1 million
for that year (the actual tax exemption varies from year to year). The
estate tax would then only be levied on the $2 million balance. If these
same assets were titled to a limited partnership, they would be subject
to a discounted valuation. Generally, assets titled to a limited partnership
result in a discounted value of 20 to 40% compared to their estate tax
value when owned outright. This results in a correspondingly lower or
in some cases non-existing estate tax.
Several factors determine the amount of the allowed discount. Specifically,
the IRS primarily considers:
Control the decedent had over the partnership
Marketability of the partnership assets and the ability to quickly liquidate its assets
Accessibility of the partnership interests by the decedent's estate
On the issue of control, the family may, for instance, decide to have the
children become the general partners as their parents get older. Divesting
control from the parents allows for a greater discount on the value of
their partnership interest upon their deaths. Cash and marketable securities
support a smaller discount compared to a limited partnership consisting
of real estate or stock in closely held corporations.
The question of the limited partnership valuation discount is one that
has the full attention of the IRS, who routinely contest a decedent's
discount valuation and who systematically petition Congress to disallow
the discount. Because tax policies and regulations on the subject are
likely to change, obtain guidance from your tax advisor when using the
limited partnership for estate or gift tax planning.
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