In our last Newsletter, we mentioned the "family limited partnership" as a vehicle for making tax-saving gifts. Such partnerships have become quite popular in the last couple of years.

A common arrangement is for the senior, presumably wealthier generation (the parents) to transfer business, real estate, or investment assets to a new partnership and at the same time give limited partner interests to their children. The parents usually serve as general partners and thus remain the "managers" of the assets. The children enjoy the economic benefits of their (limited) partnership interests, by means of income distributed to them. The income of the partnership is taxable to the partners in proportion to their interests. The partnership succeeds to the parents' cost basis in the assets.

The potential benefits of this arrangement include the following:

1. The gifts of partnership interests, upon formation and in subsequent years, reduce the parents' taxable estate. They may be made to qualify for the $10,000-per-person-per-year annual gift tax exclusion.

2. The value of these gifts may commonly be "discounted" due to the children's lack of control over the partnership, thus allowing the parents to compress more value into the use of their gift exemptions.

3. The parents retain management authority, and may also predetermine succession of control.

4. The partnership agreement may be drafted to discourage creditors from seizing a child's interest.

5. The partnership may be used as a device for the financial education of children through periodic family meetings.

If you would like to discuss the family partnership idea (or any other estate planning issue) further, please contact the lawyer with whom you work, or Alan Macpherson, Al Falk or Eileen Peterson of our Tacoma office.