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Saturday, July 7, 2012

NY Times: Wealthy Turn to Family Limited Partnerships

New York Times:  In an Unusual Tax Year, the Wealthy Turn to Partnerships, by Paul Sullivan:

A Family limited partnership was once a rather esoteric way for wealthy families to centralize the management of real estate and various pots of money. But this is not a normal tax year.

The arcane device has suddenly become popular because of the scheduled expiration of the $5.12 million gift tax exemption at the end of this year. ... But wealth advisers cautioned that the rush to set up a partnership in order to use the tax break could lead families to do something that is not right for them.

For some families, a partnership is attractive. It is a way to combine money to reach the higher investment requirements that hedge fund and private equity managers require. But its most alluring feature may be the ability to discount the value of the assets put into the partnerships because the shares distributed from it are less liquid since only another family member can buy them.

A discount of 25% generally does not attract scrutiny from the IRS, and that could allow someone to increase a $5.12 million gift exemption to $7 million. Since the partnerships are not overly expensive to administer, several advisers said they have seen people starting them with as little as $2 million. But affluent families on the lower end of that range also risk running afoul of the IRS by being too aggressive in what they put into a partnership and how much they discount it. As families look for ways to get the most out of this year’s gift tax break, many of the advisers I spoke with said they were worried that less sophisticated families would be misled into thinking that they could put everything they had into a family limited partnership and never worry about taxes.

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