With the unexpected era of a $5 million federal estate-tax exemption upon us for at least the next year and a half, both estate and post-mortem planning have suddenly taken on added considerations. For years, estate-planning attorneys have assisted wealthy clients with techniques to centralize the management of their various investment holdings, while also attempting to reduce their taxable estates. One such technique is the formation of a family limited partnership (FLP).
The FLP provides in part an opportunity to maximize lifetime gifting through the discounting of partnership interests (for lack of control and marketability), which ultimately allows clients an opportunity to reduce the size of their taxable estate faster than if they made outright gifts of individual assets to their descendants. In previous years, with federal estate tax exemption amounts of only $675,000 to $3.5 million, and federal tax rates reaching upwards of 55 percent, many clients would gladly take this opportunity to avoid paying federal taxes on these gifted assets, even if it meant surrendering the potential step-up in basis on these assets upon their death. Similarly, in an attempt to minimize the estate-tax burden upon death, the fiduciaries of these estates have also typically pursued aggressive discounts on the FLP interests remaining in the estate.
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