How does the family partnership work?

You typically would transfer some asset(s) to a partnership you form. The partnership, and not you, would then own the asset(s). You instead would own percentage interests in the family partnership. You would then give at least a 1 percent unit to each of your family members. The units could not be sold or otherwise transferred. Outsiders could not purchase or otherwise acquire units without the consent of all family partners.

There are two key factors:

(1) You, as managing partner, may own as little as 1 percent of the partnership units but still control the management of the partnership assets. On the other hand, your family members may own as much as 99 percent of the units but have no control.

(2) The total of the value of all partnership units is less than the total value of the underlying partnership assets. This occurs because an outsider would not pay you 100 cents on the dollar for a partnership unit.

A primary benefit of the family partnership is you can reduce your taxable estate and so reduce the estate taxes your family pays when you are gone. This is done by your carrying out a “planned gifting” program to divest yourself of partnership units by giving them to your family members over time. This will reduce your estate subject to the estate tax, but you, as managing partner, will still control the partnership and its assets.

For gift tax purposes, a partnership unit you give to a family member will be valued after deducting the discounts discussed below. These discounts make gifting a partnership interest more attractive because more value can be passed out of your estate at a lower gift tax cost.