For years, the wealthy have been using estate-planning techniques that are unfamiliar to many people who could benefit from the same techniques. For example, if estate taxes are a concern, read how you can use a simple device, the Family Partnership, to slice your tax bill.
Let's say that you and your spouse own a farm with a $1 million value. If left in your estate, this could get burdened with estate taxes up to 55% of the value. Wouldn't it be nice if we could "shrink" the value for estate tax purposes? The Family Partnership can do this as follows.
You have an attorney draw up a family partnership document, which creates a family partnership (just like you had the attorney draw up a living trust document, which created a living trust). The farm now gets deeded to the family partnership. This is a non-taxable event. In return for donating the farm to your family partnership, you and your spouse receive 100 partnership "units" in return to evidence your ownership in the partnership. Think of these units as shares.
Each year, you begin gifting some of these partnership units to your children (e.g. each unit has a value of $10,000, so you and your spouse can gift two units to each child and take advantage of the annual exclusion). But here's the best part. For estate tax purposes, the farm inside the family partnership is worth only $700,000 (rather than $1 million). Why is this?
The IRS allows a valuation discount. The partnership units that you have given away to your children are not worth $10,000 each. These are virtually unsaleable to anyone and your children have no control over the farm. Additionally, no one wants such a small interest in the farm because they would also have no control. This is called the marketability discount and minority interest discount. As a result, the farm value for estate tax purposes is now only $700,000! You have just wiped out $300,000 of estate value, a potential estate tax savings of $165,000 by forming a family partnership.
This is a simple example of a very useful technique. If you would like to know more, please check off on the coupon and we will send you a more detailed article on this widely used technique for saving estate taxes.