New York Estate Planning & Elder Law Blog
Partnerships, or “limited partnerships” LP, established with individual member capital contributions of money and property in the interest of forming a business are potentially asset that can be a substantial factor in estate planning. The transfer of business and personal capital to legacy capital establishes a trust for grandchildren or other beneficiaries who will benefit from a decedent’s wealth long-term. One of the main challenges is protecting those former business assets from taxation.
“Pass-through” Partnership Tax Rules
The legal treatment of a LP is one of discretionary liability where partners are concerned. This bodes well for estate planning, as there is little worry of another general partner influencing the actions of an estate. All U.S. states have adopted the Revised Uniform Partnership Act (RUPA) so that all laws are consistent with federal rules to partnership. Partnerships (IRC §761) comprised of two or more members are not considered taxable entities as result.
The Internal Revenue Service (IRS) excludes some “family limited partnerships” from federal tax reporting with exception of 1040 individual tax filings. Partnerships agreements can be executed to consider partners exclusively as “co-owners” or “joint-investors” with separate tax rule obligations. A recently deceased partner’s estate will be responsible for the individual income tax filing of that member. IRS guidelines to partnership taxation defines the legal relationship of partners to capital investment and income. As partnerships are pass-through entities, income tax reporting to the IRS is done on an individual basis by each partner.
Although the partnership may report income to the partners, the entity is not responsible for filing income reporting directly to the IRS for purposes of tax payment. There is also flexibility in the reporting of taxes, as the entity may elect to report income a different year from that of individual partner tax filings. Limited duration partnerships are customarily excluded from being treated as a partnership by the IRS.
Transfer of Capital Assets to a Decedent’s Estate
The IRS rules to tax reporting consider death automatic withdrawal from the partnership unless otherwise stipulated in the partnership agreement. Retiring partners or the estates of deceased partners are taxed on basis of individual filing status. Income tax is accorded a partner’s share of profits for the current tax year. The assets of a deceased partner become part of the member’s estate. Property of the partnership is distributed equally to the partners. The same rule applies to both retiring or recently deceased partners, with gains or losses accorded to shared property value.
When filing taxes, a recently deceased partner’s capital interest is subtracted from the partnership’s taxable income. A tax basis greater than the proceeds is deducted as a loss on investment. Capital accounts are not affected by partnership debts. Debt relief is treated as income for retiring partners or their estates if a partnership is terminated or sold. Loans made taken by a partnership are considered an asset with proceeds at time of death, unless offset by the liability of debt collections attachment.
Professional Estate Planning Consultation
Family owned businesses formed as family “limited” partnerships have certain tax advantages, especially in estate planning. When planning your estate, assets from an LP are attributed to the business, personal, and legacy capital reflecting the interests of your trust and its beneficiaries. Learning about estate tax rules is part of this process. Estate planning advisory from a licensed attorney is assurance that your beneficiaries will be protected by your wealth in the future. Ettinger Law Firm is an attorney practice providing legal advisory of estate planning matters. Contact Ettinger Law Firm for a consultation about a probate tax matter.