If a couple is in a taxable estate situation, combined assets in excess of $10,980,000, and holds a substantial amount of real estate, forming a family limited partnership (FLP) should be considered. The structure and formation of an FLP is rather simple. A husband and wife transfer investment real estate into a limited partnership in exchange of all the general and limited partnership interests, with the general partnership units equal to 2% of the value and the remainder as limited partnership units. The general partnership units have full control as to the operation of the partnership. The limited partnership interests are able to be gifted to kids and grandkids, generally at a discounted value due to lack of control and marketability. This leverages potentially both the annual exclusion amount and the lifetime exclusion amount. Any amount removed from the estate saves as much as 40% federal estate tax.
What if the grantors wish to retain an income stream after the gifts are made? In this case they could consider a part gift/part sale to an intentionally defective grantor trust (IDGT). The couple would decide on the amount of income they wish to receive. They would then sell limited partnership units to a grantor trust in exchange for a promissory note. The trust is set up so the assets transferred are excluded from the grantor’s gross estate but still owned by them for income tax purposes. Because a grantor trust is a disregarded entity for income tax purposes, this is actually a sale to themselves, so it is not reportable.
This could be a very valuable estate tax saving technique for a large estate. Please contact your Hawkins Ash tax advisor to discuss your options.