How to Use Partnership Income Tax Rules for The Purposes of Estate Planning

There are many different strategies that exist for passing wealth from one generation to another without having to encounter the estate tax. Many of these, however, may still be subjected to the generation skipping tax and other congressional measures. A novel strategy that may help you accomplish the goal of avoiding these consequences while passing on wealth to future generations is known as granting family members a partnership interest in the family business.

Estate planning will usually attempt to reduce any current asset values or to shift future appreciation to other generation. Some of the primary tools used to accomplish this include gifting, grantor to retain annuity trust, sales to intentionally defective grantor trust, and qualified personal residence trust. Each of these have pros and cons associated with them, however.

A partnership may be classified as compensation under Revenue Procedure 93-27. This provides that a profit interest is a partnership interest rather than a capital interest. If a taxpayer receives a profit interest in a partnership in exchange for any services rendered, the initial receipt of such an interest is typically not taxable to the recipient nor is it deductible to the partnership. This tool may prove extremely valuable in the event that you have a family business and have concerns about protecting your interests going forward. Consulting with an experienced estate planning attorney is strongly recommended for this particularly advanced strategy. Having someone who has exceptional attention to detail and dedication to accomplishing all of your estate planning goals is important.