Not to mention the estate planning benefits along the way!

THE PERFECT TIME TO IMPLEMENT YOUR STRATEGY IS NOW!

For those unfamiliar with family limited partnerships (“FLP”), in short, it is an entity in which typically the older generation funds with cash, investments, brokerage accounts, publicly-traded stocks, real estate assets, and just about any other property to implement, principally, two strategies: first, to take full advantage of the sunsetting provision of the estate tax threshold of $26,000,000 for a couple of $13,000,000 for an individual with the top tier rate of 41% estate taxes kicking in at that point and, second, for asset protection purposes. The purpose of this short article is to give the reader an explanation of these plans and related issues; no client should implement this strategy without speaking with legal counsel, including their tax planning professionals.

Impending Sunset – Act Now and Implement Your Strategy before January 1, 2026. January 1, 2026 is an important date for estate and gift tax purposes: that is the date upon which the current law shields $13,000,000 of an individual’s estate and a couple’s $26,000,000 of a couple’s estate from federal estate taxes. Although as generous as that may be, under current law, the top tier rate of 41% kicks in on asset values in at that point. However, under the “snapback rules” currently in place, on January 1, 2026, the $13,000,000 amount drops down to approximately $7,000,000 and the $26,000,000 amount drops to approximately $14,000,000, over which threshold the top tier rate of 41% kicks in.[1] This “snapback” on January 1, 2026 is commonly called the “2026 Snapback.”

The Family Limited Partnership is Perfect for Estate Planning Purposes. A perfect vehicle to take advantage of the impending “snapback” is to fund assets into a family limited partnership. Briefly summarized, this vehicle is a family partnership with the donors (Mom and Dad) funding it with their assets in which both remain as general partners or in control of an entity in which they retain sole control. Limited partners can also be Mom and Dad, but also their three children, Aaron, Benjamin, and Chaya. Variations of the limited partnership owners can also be trusts (direct with the beneficiaries being family members) or charitable trusts, both tangents being beyond the scope of this article at this time. In short, if a total of $10,000,000 of assets is funded into the FLP, due to the “loss of control factor,” the net value of the gifts becomes as low as perhaps $7,000,000, thereby removing $10,000,000 from Mom and Dad’s estate and saving millions of dollars in federal estate taxes; additional savings could occur at the state level depending on the state of jurisdiction where Mom and Dad passed away. At the same time, Mom and Dad did not want to “lose control” of the assets and they can effectively “control” the assets to a great deal. Finally, Mom and Dad can pay themselves a reasonable salary to manage the fund, which is a tax deduction to the FLP, thereby diverting income from the FLP back to Mom and Dad.

The Family Limited Partnership is Perfect for Asset Preservation Purposes. Additionally, the FLP is a great strategy to protect family wealth from creditors because it is a separate entity not in the direct ownership of Mom and Dad and provisions within the FLP may be written to prohibit attachment of shares from creditors. While under most states’ laws, creditors can attach the “proceeds” of these shares (interest and dividends), such distributions may be protected by other language through trust vehicles. Finally, if Mom and Dad elected to use the FLP to personally guarantee development of a project or enterprise, they may do so or elect not to do so. While we generally prefer to keep the FLP away from any possible credit, our recommendations are typically that Mom and Dad use their non-FLP assets for such guarantee purposes.

Act NOW to Implement Your Strategy! Whatever the client elects to do, the time is now to at least review one’s estate plan and speak with their tax professionals and attorneys to find out the best solutions to prepare for the “2026 Snapback.” Weiss LLP has a wealth of experience in asset planning, partnership and close enterprise and entity transactions and can be of tremendous assistance. Call us for more information at 202-296-2121.

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[1] The above amounts of $13,000,000/$26,000,000 and $7,000,000 and $14,000,000 are indexed for inflation and are subject to change accordingly. Further, anything stated in this article is also subject to action by Congress changing the rate of 41% or the snapback amounts, up or down. Such adjustments have happened in the past, although it is believed unlikely to occur now due to the relatively short time between today and January 1, 2026.