Question
D has three assets which make up the vast majority of Ds estate: (i) Ds house (real estate) valued at $18,000,000, with an adjusted basis
D has three assets which make up the vast majority of Ds estate: (i) Ds 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 Ds 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 Ds children are ready to take over the business, and of course D needs a place to live.
D has been told by one of Ds 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 Ds children, D will receive a transfer tax discount for lack of marketability (difficult to sell) and lack of control (if recipient cant 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:
- Is there support/authority for Ds advisors 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).
- Ds 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 Ds children. Ds advisor believes that D will receive a gift tax discount for the transfers of the limited partnership interests to Ds children, and thus remove substantial value from Ds estate (the limited partnership interest gifted to children).
- 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 Ds transfer tax, a brief statement why, and cite at least one primary authority to support your conclusion:
- 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 Ds support from P (e. not in the partnerships (General Partners) discretion
- 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%.
- Suggestion 3: D should not transfer all assets to P. D should retain asset (i), Ds house, to own personally.
- Suggestion 4: Ds 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.
- 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 Ds transfer tax, a brief statement why, and cite at least one primary authority to support your conclusion:
- 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.
- As an alternate structure, Ds 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 Ds 4 children. Ds 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.
- Do you believe D will receive a gift tax discount (YES or NO and cite authority)?
- Would it make a difference if the beneficiaries were Ds nieces and nephews and not D children (YES or NO cite authority)?
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