D has three assets which make up the vast majority of D’s estate: (i) D’s house (real estate) valued at $18,000,000, with an adjusted basis of $1,000,000, (ii) an operating business valued at $72,000,000, and (iii) a bank account with $10,000,000 cash. D has already used the majority of D’s unified credit. D would like to transfer these assets to the next generation at as low of a transfer tax cost as possible. D trusts the next generation (his four children) and is not opposed to ceding financial control to them, however, as D has superior working knowledge of the business, D would like to maintain some form of operational control at least until D’s children are ready to take over the business, and of course D needs a place to live.

D has been told by one of D’s financial advisors that if he transfers some or all of his assets to a Partnership and then transfers/gifts non-voting (“limited”) partnership interests to D’s children, D will receive a transfer tax discount for “lack of marketability” (difficult to sell) and “lack of control” (if recipient can’t vote their shares or is in a minority position). D has also been told that there is a possibility of reducing transfer taxes by transferring just a remainder interest to a trust a retaining an income interest for life.

Questions:

1. Is there support/authority for D’s advisor’s suggestion that D can receive a transfer tax discount (for marketability and control) if D transfers (gifts) limited partnership interests (non-voting) to his children? (YES or NO and citation).

2. D’s advisor has suggested the following: That D transfer some assets to partnership P (“P”) in exchange for a 98% limited partnership interest (non-voting) and additionally transfer cash to P in exchange for a general partnership interest (voting and control rights) which could or could not be 100% of the General Partnership. (The General Partner, by majority vote, has the power to make/control partnership distributions, business decisions and operations). D would then transfer/gift the limited partnership interests to D’s children. D’s advisor believes that D will receive a gift tax discount for the transfers of the limited partnership interests to D’s children, and thus remove substantial value from D’s estate (the limited partnership interest gifted to children).

a. Below are separate additional suggested actions that D can take with regard to the trust. For each additional suggestion state whether the suggestion will “help” or “not help” D achieve the goal of reducing D’s transfer tax, a brief statement why, and cite at least one primary authority to support your conclusion:

i.  Suggestion 1: Include a clause in the partnership agreement which states that D is entitled to live in the house and receive minimum distributions for D’s support from P (e. not in the partnership’s (General Partners) discretion

ii.  Suggestion 2: D would transfer all assets to P, except for $2,000,000, in exchange for a 98% limited partnership interest (which D would then transfer to children) and transfer the $2,000,000 to P in exchange for a General Partnership Interest which D would control 100%.

iii. Suggestion 3: D should not transfer all assets to P. D should retain asset (i), D’s house, to own personally.

iv. Suggestion 4: D’s kids should each also contribute assets to the General partnership and kids should receive a proportional share of partnership interest (receive an ownership percentage equal to what they contributed). Kids should receive at least a 50% interest in the General Partnership. Additionally, the partnership should contain a clause which states that all partnership distributions must be made proportionally to the ownership interest.

3.  Could it make a difference (in determining the success of obtaining a transfer tax discount) if the children were already in the same business and had obtained work experience? Cite yes or no, state why and give citation of supporting authority.

4. As an alternate structure, D’s advisor suggests that D transfer all assets to an irrevocable trust. The terms of the trust would be that for a term of 10-years the trust would pay all income to D, and then distribute all assets equally among D’s 4 children. D’s advisor suggests that D could transfer the property at a discount equal to the FMV of the property transferred less the value of the income interest retained by D.

a.  Do you believe D will receive a gift tax discount (YES or NO and cite authority)?

b.  Would it make a difference if the beneficiaries were D’s nieces and nephews and not D children (YES or NO cite authority)?

Answer rating: 100% (QA)

1 Yes The transfer of nonvoting interests in a Partnership may receive a discount for lack of control and lack of marketability See Rev Rul 8513 19851 CB 196 discount for lack of control and lack of m... View the full answer