Notes

Outline

Slide 1

HOTTEST ESTATE PLANNING STRATEGY Tax Advantages: The Ability to “Discount” the Value of a Partnership Unit Transferred The Ability to “Shift” Income to Other Family Members Enhance Systematic Gifting Program

HOTTEST ESTATE PLANNING STRATEGY Non-Tax Advantages: Achieve Creditor Protection Diversify Family Investments Teach Financial Skills to Family Members Simplify Division of Assets

Formation of Family Partnership Dana Family Limited Partnership

Two Classes of Partners General Partner: Full Voting Rights Manages the Partnership Liable for Partnership Debts Limited Partner: No Voting Rights Does not Participate Management Not Liable for Partnership Debts

TAX CONSEQUENCES OF FORMATION Sec. 721 - Tax Free to Partners & Partnership Assets Inside Partnership Receive a Carryover Basis Partnership Units Receive a Substituted Basis

Gifting Limited Partnership Units

WHATS THE VALUE OF A 1% UNIT?

Explanation of Valuation Discounts §2012-Price That A willing Buyer Would Pay For a Non-Voting Interest Discounts Available Tax Advantage of FLP 30% - 40% Discount

DISCOUNTS: ESTATE & GIFT TAX Transfers During Lifetime:  Discounts on the Units Transferred - Reported on Timely Filed Gift Tax Return - Form 709 Transfers at Death: Discounts on the Units owned by the decedent – Reported on a Timely Filed Estate Tax Return –Form 706

Gifting Partnership Units to  Children

Gifting Partnership Units to GST TRUST

Income Tax Attributes of FLP Pays No Income Tax “Flow Through” Entity Income Prorated - Paid by Partners - K-1 Expenses Flow Through Pro-rata - K-1 Income Tax Paid Independent of Partnership Distributions (“Phantom Income”) Income Shifted to Lower Tax Brackets

Example: Income Taxation of FLP

DISTRIBUTIONS Decision of the General Partners Independent of the Income Tax Consequences Generally, Distributions are Non-Taxable Generally, Pro rata Distributions Based on Units Owned Disproportionate Distributions in Certain Cases

EXAMPLE: Distributions

DISPROPORTIONATE DISTRIBUTIONS: Salaries

INCOME SHIFTING TECHNIQUE

CREDITOR OUTSIDE CANNOT REACH ASSETS INSIDE!

Creditor Protection of Assets Inside Partnership Sole remedy of creditor - charging order No right to force Liquidation No right to force a Distribution No voting rights Right to share assets upon Liquidation Rev. Rule 77-137 Owner for Income tax Purposes - “Phantom Income” Forces Creditor to Settle Claim at Discount

CREDITOR INSIDE CANNOT REACH ASSETS OUTSIDE!

OUTSIDE CREDITOR PROTECTION Creditors Within the Partnership Can Only Attach Partnership Assets Veil of Protection of Personal Assets for All   Limited Partners General Partner Has Personal Liability for Partnership Debts and Obligations

WAYS TO ELIMINATE ALL PERSONAL LIABILITY! Use a Corporation as the General Partner     Liability is Limited to Assets in the Corporation    Ability to Use Greater Valuation Discounts Use a Limited Liability Company “LLC

ADVANTAGE OF COMBINING FAMILY ASSETS

Division of Assets Many assets are difficult to divide Division may be necessary to fund the Credit Shelter and Marital Trusts With a Pship, assets can be easily divisible Can separate control from equity Pship can be created Post Mortem

IMPORTANCE FOLLOWING PARTNERSHIP FORMALITIES Do Not Pay Personal Bills From Partnership Funds Register Partnership With The Secretary of States Office File a Separate Income Tax Return Each Year Make Distributions Proportionate

Slide 27