Estate Planning to Transfer Assets

Although the federal estate tax is scheduled to be reduced gradually until it is eliminated in 2010, a provision in the 10-year, $1.35 trillion tax relief package of 2001 prevents its permanent demise. Unless Congress takes action beforehand, the estate tax will return to pre-legislation levels ($1 million exemption and a top rate of 55 percent) in 2011. An ongoing dispute over whether to make the estate tax repeal permanent has added to the uncertainty.

One way to avoid the confusion and potentially reduce your exposure to federal estate taxes is to transfer assets to your loved ones during your lifetime with something called a Family Limited Partnership. The FLP provides nearly limitless transfer potential.

Why an FLP can Greatly Enhance Estate Planning

The current tax law allows an individual to exempt $1 million from federal estate taxes. Successful business owners who also own a home and other investments in real estate or securities might find they easily surpass this limit. Even though the exemption amount will rise to $3.5 million in 2009, the value of your estate could grow significantly during the same period.

An FLP can be especially useful to small-business owners because they can potentially transfer wealth without having to sell or relinquish control of the business. Under this strategy, a general partner (or a corporation or limited liability company controlled by the general partner) sets up an entity for the benefit of limited partners such as a spouse or children.

At the core of the FLP is the gift-tax exclusion, which currently allows you to give $11,000 per year per person without incurring gift taxes. Because the limited partners have no control over their shares and no way to liquidate them, their value may be discounted by as much as 35 percent from fair market value. After the discount is applied, a limited partner could be given a roughly $18,000 share in rental property or a business that may be valued at $11,000 for gift-tax purposes.

A measure to make the estate tax repeal permanent passed the House of Representatives in May but was rejected by the Senate in June, virtually ensuring that the issue will continue to be debated in this fall’s election.

With such a murky outlook, it may be more important than ever to take steps now to plan for the possibility that the estate tax will come back to life in 2011. By setting up an FLP now, you may be able to shield a greater portion of your assets from taxes.

Get Help when Planning your Estate

Before you take any specific action, be sure to consult with your tax professional. The use of these approaches can involve a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing such strategies.