When a Philadelphia family has amassed a certain level of wealth, a great deal of effort is focused on trying to shield that wealth from excessive taxation, thereby preserving a greater share for future generations. One tool that meets both of those goals lies in limited family partnerships. According to recent comments made by government tax authorities, this estate planning approach could soon be eliminated, leaving many families scrambling for an alternative.
A limited family partnership is created to hold a family business. Under current rules, that business can consist of nothing more than the management of a family's securities portfolio. The individual or couple who owns the business can give children and grandchildren limited interest partnerships in the business. When it comes to evaluating those partnerships for tax purposes, a tax discount is given.
The discount is based on the fact that a limited interest is not as marketable as other types of involvement. Limited partners also have less control over the assets held within the business. These factors lead to a lessened appraised value of the assets, and a lower overall tax bill. Meanwhile, the assets are securely held within the limited family partnership, and can be passed down to one's children and grandchildren when the time comes. The value of the business is also removed from the original owner's estate, which can have estate tax benefits.
Should the IRS act to put a limit on the tax benefits currently afforded to limited family partnerships, some Philadelphia families will be in need of a new estate planning approach. While there has been no formal announcement of such a change, many within the industry have felt that the matter has been a priority for the IRS for some time. It is possible that this powerful estate planning tool could soon be unavailable to families across the nation.
Source: The Wall Street Journal, "IRS Takes Aim at an Estate-Planning Strategy", Liz Moyer, June 26, 2015