We use estate tax freeze when we can restructure the company with voting preferred stock and non voting common stock. And the owner wants still wants to control the firm for now and let the next generation to pay tax in the future.
For the Limited Partnership, the owner needs to pay tax now but based on a reduced value because of the valuation discount of the limited partnership.
When do we use one over the other? Does this reply on when the owner wants the tax to the paid? If they want to pay now while the LP is available, they will choose the LP method? If they want their children to worry about the tax in the future, they use the estate tax freeze method?
It’s not necessarily driven by when they want to pay tax or not pay tax.
If you hear a scenario about keeping control and wanting to maximize gains for future generation then you want an estate freeze.
If you don’t care about control and want to maximize tax benefits then just keep it in a LP.
I think the key here is not necessarily which offers the best benefit but the fact if you want control or not. I haven’t seen a question where it asks you to see which of the 2 is better, but to know when to use them.
*Added… Estate is also for when you die just to added to the key words of when to use which.
It really depends on what assets you are talking about here. You can create a FLP (family limited partnership) with a bunch of land or even a stock/bond portfolio (although this wouldn’t get as much of a discount). If you are a small business owner of a corporation then the estate tax freeze would make more sense as all you would have to do is restructure the stock.
in either of these you keep control of the assets. In a FLP you keep the GP interest (usually at 1%) but gift the other 99% LP interests over time. The GP in a partnership structure has all the control. The LP’s don’t.
You can also discount the limited partnership interests to where they are below the annual exclusion amounts so no tax is due and gift them overtime. This would mean you would be paying little to no tax. This is typically how it’s done in practice.
This makes a lot more sense now! Thank you both for the explanations!!
I didn’t know that land comes in bunches.
I always thought that it came in chunks.