Family Partnerships

A Family Partnership is an entity designed to hold family assets such as marketable securities, real estate, and operating businesses. The Partnership Agreement can be drafted to allow for lifetime transfers of Partnership interests as well as transfers upon an individual’s death to his or her descendants

Using a Family Partnership may result in additional administrative duties because the Partnership must be operated just like any business, with a bank account, annual or more frequent meetings, and a record of all business decisions that are made with regard to management of the property.  A transfer of an interest in property to a Family Partnership will not affect the tax basis in the property. The Partnership interests received in exchange for a share of the property placed in the Partnership will have the same total basis as the individual’s current tax basis in the Property.

One benefit of the Family Partnership is that an individual may be permitted to use valuation discounts for lifetime transfers.  This is an option if the Partnership Agreement restricts the transfer of Partnership interests to outside third parties but permits transfers to a Partner’s descendants. Valuation discounts may counter the negative implications of selling low-basis property that has appreciated in value during the period of ownership.

By making lifetime gifts of partnership interest, an individual may use valuation discounts as allowed by the IRS for the transfer of “closely held business” interests. The designation of a “closely held business” is useful for a Family Partnership because it infers that interests are less marketable and therefore less valuable.

Valuation discounts do not affect the basis of the property being transferred.  However, the discounts allow an individual to transfer a larger quantity of Partnership interest to beneficiaries each year. Assuming that the beneficiaries are in lower tax brackets than the original property owner, transferring income-generating property to a younger generation typically results in less income tax paid on the income from that property.

In conclusion, a Family Partnership can be beneficial to families who want to manage the transfer of family assets from one generation to the next.  The Family Partnership can be part of a business succession plan for the transfer of interests in a family business.  In addition, it allows an older generation to reduce the size of their estate while remaining active in the decision-making and management process.  As always, special consideration should be given to each family’s unique set of goals before creating an entity such as a Family Partnership.