Discussion: A general partner in a partnership has unlimited legal liability but also has managerial control over the partnership. A limited partner has limited liability but does not exercise control over the day-to-day operations. John, your client, owns a machine shop operated as a sole proprietorship. The business is worth $10,000,000. He would like to transfer a portion of ownership to his two adult children, Cindy and Luke, by converting the business into a partnership. How would you structure a partial transfer of ownership in the business to Cindy and Luke to achieve a fair market value of the transfer that is less than Cindy and Lukes proportionate share of the $10,000,000 value? Are there any penalty concerns associated with the valuation discounts that your proposed transfer takes advantage of, especially if the valuation is found to be inaccurate?

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I would first advise John to draw up a will. If he doesnt have a will and passes away, then his estate might be divided in probate course. This could leave the beneficiaries of his estate a big bill and we would highly advise the client to do that before anything else. Next I would suggest that he set up a trust where he can appoint a trustee to distribute his wealth upon his death. This will help keep the assets from being subject to estate taxes and the client will be able to determine how the assets are distributed either upon his death or while he is alive (LaPonsie, M., 2020).

The next thing we need to talk to John about is a family limited partnership (FLP), which can help to accomplish long-term minimization of his tax liability. A family limited partnership is a holding company owned by two or more family members, which is created to retain a familys business interests, real estate and other assets. The main purpose we suggest an FLP is to create creditor protection and reduce gift and estate taxes. This will also help our clients maintain control over the management and distribution of the partnerships assets (BNY Mellon).

John would need to create and donate assets to the FLP in exchange for general (GP) and limited partnership (LP) interests and then gift the LP interests to Cindy and Luke over time. As of the Tax Cuts and Jobs Act, John can gift up to $11.18 million to his family and if youre married you can pass along $22.36 million without paying federal estate taxes. If he gifts more than the lifetime exclusion then the assets above the threshold will be taxed at 40% at the federal level. He also could be subject to state taxes as some states impose an additional estate or inheritance tax over the exclusion amount. An added benefit comes when the GP is no longer able or willing to exercise control over the FLP, they can determine who shall receive their GP interests in the future (BNY Mellon).

Under the IRC 2512, it states that if a gift is made as a property, its value at the date of the gift shall be considered the amount of the gift. The value of the property is the price at which such a property would change hands between a buyer and a seller. Every year you can also gift your children up to $15,000 to $30,000 tax free worth of the FLPs interests (IRC 2512).

ANSWER THIS: In responding to classmates, comment on how the Andrews, Curry, Cook, andOKeefee cases covered in the required reading support or undermine the structuring of the ownership transfer to attain valuation discounts that your peers have proposed.