Funding the Family Limited Partnership

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A family limited partnership is generally funded with specific assets. Real estate provides the ideal investment, but not all assets are suitable for transfer to the partnership. Regarding corporate partners, S-corporation stock cannot be held by a partnership. Partners do not recognize gain or loss when they contribute property to the partnership in return for their partnership interests. Additional capital contributions do not generate a gain or loss for partners or the partnership.

When a partner contributes capital or assets to the partnership the partner is given an interest in the partnership in accordance with the partner’s contribution as a percentage of all contributions. Any additional contributions will increase the partner’s share and other shares must be adjusted accordingly.

Gifting of Partnership Units

Easy division of partnership interests into units offers the ability to transfer assets to family members within the available annual gift-tax exclusion which is $14,000 per year per donee for 2014-2015 or the unified credit exemption equivalent is $5,340,000 in 2014 and $5,430,000 in 2015. There are valuation discounts that may be used to reduce the value of the partnership units by 20 to 40 percent for gift tax purposes.

Three types of valuation techniques are generally...

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