Estate tax planning is one of those things no one wants to think about. But the implications can be huge. The best way to illustrate the direct financial benefits of Estate Tax Planning is through the following case study:

 

A client has a profitable rental real estate business which is in a limited partnership entity. The limited partnership owns several properties. The client and his wife are both 62 years old and each owns a 5% general partnership interest and a 45% limited partnership interest. They have two adult children who will ultimately inherit all of their $8 million estate (of which the partnership is worth $2 million).

 

We let the client know that we can do estate tax planning to shift his and his wife’s limited partnership interests to their adult children over time without triggering the gift tax while retaining their general partnership interests. General partners have virtually all the power and determine what happens to the assets in the partnership. Limited partners, while enjoying an ownership interest, have few rights or powers. Therefore, we want the donors to keep control of the gifted assets after the gift is made so we only have them gift non-controlling interests (limited partnership interests).

 

Initially we had the client get an appraisal of their underlying assets in the limited partnership. Afterward, we calculated the maximum amount of limited partnership interests that he and his wife could gift to each adult child each year without incurring gift tax. In determining this amount, we discounted the value of their limited partnership interests due to the lack of marketability and minority interest discounts. Therefore, the value of the limited partnership interests being gifted will be less than the fair market value of the proportionate share of the assets they represent.

 

As a result of our estate tax planning, the client will save a significant amount of estate tax, since they will have transferred a large amount out of their estate without triggering the gift tax. They will also retain control of the entity by retaining their general partnership interests. It is important to remember that the cost of transferring wealth from one generation to another can be substantial without proper estate tax planning.