Vol. 7, No. 3, No. 32. USE OF FAMILY LIMITED PARTNERSHIPS IN ESTATE PLANNING.

• Author: By Robert E. August, LL.M.

South Carolina Lawyer

1995.

Vol. 7, No. 3, No. 32.

USE OF FAMILY LIMITED PARTNERSHIPS IN ESTATE PLANNING

32USE OF FAMILY LIMITED PARTNERSHIPS IN ESTATE PLANNINGBy Robert E. August, LL.M.Making gifts of property during life to intended beneficiaries is an almost universal estate planning technique for a donor likely to have a taxable estate. Certainly, it is an option that should be considered. Giving substantial amounts of property away during life can reduce the value of a donor's gross estate for state and federal estate tax purposes and significantly reduce the amount of estate tax imposed on the transfer of property at death.

GIFT TAX RULES

Of course, making substantial gifts during life can result in the imposition of federal gift taxes. Gift taxes are imposed at the same progressive rates as estate taxes. IRC § 2502. There are several gift tax exemptions that can be utilized, however, as part of an effective estate plan.

First, a donor can give cash or property having a value up to $10,000 per year to each of his or her donees without incurring any gift tax under IRC § 2503(b) (annual exclusion). If the donor's spouse joins in the gift, the spouse is also entitled to a $10,000 exclusion, and a total of $20,000 of gifts can be given to each donee during each calendar year without the imposition of gift taxes. Thus, using the annual exclusion, a married donor with three children can give away $60,000 of property each year free of gift tax ($20,000 to each child).

One particularly effective way to maximize the advantages of these gift tax exemptions is to use a family limited partnership (FLP) as a mechanism for giving away property during life and to help reduce the value of property that will be included in the donor's gross estate for estate tax purposes.

The second major gift tax exclusion is the unified credit amount.

34 Every individual has a credit that has the effect of exempting $600,000 of property from gift and estate taxes. IRC §§ 2010 and 2505. The unified credit amount, however, works on a declining balance basis. That is, if unified credit is used to offset gift taxes in year one, the amount of unified credit available in year two is reduced by the amount already used. If the donor dies in year two, the amount of unified credit available to offset estate taxes is likewise reduced dollar for dollar by amounts previously used to offset gift taxes during life.

With the FLP, the donor can leverage his or her use of the annual exclusion and unified credit in that a larger amount or percentage of the underlying property can be given away tax free.

In the case of a lifetime gift of more than $10,000 (or $20,000 if a spouse joins in the gift), the $10,000 annual exclusion is used first, before any reduction in the unified credit amount is imposed. A donor may use unified credit to offset gift taxes during life, rather than saving it to offset estate taxes, in order to remove any future appreciation in the property's value from the estate.

One particularly...