Family Limited Partnership

CFA Level III Portfolio Management
#1

Hey guys.

I have a question regarding Family Limited Partnership (FLP). In the reading they state the following:

“In addition to the gift tax savings at the time of transfer, substantial estate tax may be saved if the concentrated position appreciates further between the date of the gift and the date of the parent’s death. In the above example, if the $10 million concentrated position appreciates to $30 million by the time the donor dies, the children will hold an interest worth $6 million but only $1.3 million will be subject to transfer taxes.”

Why the transfer tax would be only $1.3 million? Is it because the tax is paid when gifted and then the FLP appreciates in value?

Thanks.

Best.

#2

Yes to your question.

At the point where the parents gift the limited partnership interests to their children, the 20% interest is worth $1.3 million (after a 35% discount), so that is the valuation that the gift tax is calculated based on.

Their point is if the value of the interest continues to interest after that to $30 million, the children would not have to pay any gift tax on the additional $20 million (compared to a case where the parents only transferred the LP interest at death).

#3

Thank you!