Using partnerships to make gifts at a discounted value.

• Author: Ellentuck, Albert B.

Facts: Alec Shearson, age 63, has been a successful investor. He now wishes to make gifts of publicly traded stock to his children and grandchildren, and has assembled a portfolio with a $1 million value from which he wishes to make these gifts. Alec would like to restrict the donees' access to the stocks (at least for the time being). He also would like to continue to direct trades within the portfolio for the near term. Finally, he wants to ensure that these gifts are made in a tax-effective manner. Alec seeks the advice of his tax adviser as to a gifting program that would best achieve these objectives. * The tax adviser has suggested Alec form a limited partnership, AS Investments L.P., to own and manage the portfolio he wishes to give to his children and grandchildren. Alec would be the general partner during his lifetime, but would own I most of his interests through "limited partnership units." Each of the units would represent 0.1% of the partnership's equity (with a value of $1,000). Alec's wife also would be a limited I partner at the outset (since two partners would be needed to form the partnership). Then, instead of giving shares of stocks to his children and grandchildren, Alec would give them limited partnership units of AS Investments. Issue: How will gifts of units in the limited partnership be valued for transfer tax purposes?

Analysis

For gift tax purposes the value of a gift is its fair market value (FMV), which is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of all relevant facts. If Alec should make gifts of shares of stock, the FMV of those gifts for gift tax purposes would be the value at which the shares traded on the date the gift is made.

In the tax adviser's proposed structure, while each donee would acquire the same proportionate interest in the stock portfolio Alec has assembled, the donee would not have the same control over, or access to, that value. For example, Alec would retain the right to make investment decisions for the portfolio. Additionally, a donee would not be able to liquidate this asset as easily as if he had acquired the underlying stock, so it would be more difficult for a donee to obtain the cash equivalent of his percentage interest in the portfolio. The donee could transfer the interest only in accordance with the terms of the partnership agreement. As...