Reducing Your Estate Taxes

One of the greatest features of a LP is its ability to reduce estate taxes. In the case of an individual who dies with $3 million in cash and, provided that the estate tax exemption is $1 million (note that the estate tax exemption varies from year to year) at the time of death, an estate tax would be levied on the $2 million balance. If these same assets were titled to a limited partnership they would be subject to a discounted valuation and the tax obligation could be significantly reduced if partnership interests were valued at a lesser amount. Frequently, assets titled to a limited partnership are subject to a discounted value of 20% to 40% compared to equivalent estate tax value, resulting in a correspondingly lower estate tax. Numerous factors determine the amount of the allowed discount, including these IRS considerations:

• What level of control the decedent had over the partnership?
• What is the marketability of the partnership assets and how quickly can it liquidate its assets?
• What level of accessibility to the partnership interests are available to the decedent's estate?

A family could decide to have children become the general partners as parents get older because divesting control from the parents allows for a greater discount on the value of the partnership interest upon their deaths. Typically, cash and marketable securities support a smaller discount compared to a limited partnership consisting of real estate or stock in closely held corporations.

The IRS routinely contests a decedent's discount valuation and frequently petitions Congress to disallow discounts. Because tax laws, regulations and IRS practices related to estate valuation frequently change, it is essential to obtain expert guidance from a tax advisor when using the limited partnership for estate or gift tax planning.

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