Structuring Preferred Partnership Freezes in Estate Planning: Navigating IRC Chapter 14 Valuation Rules

Recording of a 90-minute CLE webinar with Q&A


Conducted on Tuesday, April 2, 2019

Recorded event now available

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Program Materials

This CLE webinar will provide estate planners, advisers and tax counsel with a comprehensive exploration into the planning and structuring challenges and tax benefits of "freeze partnerships" as a tool for inter-generational wealth transfer. The panel will discuss how to determine when freeze partnerships are the optimal vehicle for preserving basis, how to draft the partnership agreement and operating documents to ensure optimal tax treatment, and how to navigate the complex rules of Internal Revenue Code Chapter 14.

Description

A preferred freeze partnership is a sometimes overlooked but highly useful and flexible estate planning tool, especially for highly leveraged, low basis real estate. In its most basic form, a properly structured preferred partnership freezes a class of partnership interest by limiting it to a fixed rate of return, thus concentrating the accumulation of growth in the partnership value to the non-frozen interests. Advisers must understand the special valuation rules of Chapter 14 of the IRC to avoid potentially costly tax consequences. Such a structure may also achieve significant income tax savings from a step-up in basis for the retained frozen interest at death

Structuring a basic freeze partnership involves a taxpayer--usually a parent--contributing assets to a partnership or LLC in exchange for partnership interests that pay a fixed, preferred return, with the remaining partners receiving common growth interests. In structuring the partnership, advisers must carefully navigate the technical rules of IRC Section 2701 or the transfer may result in a deemed taxable gift.

Freeze partnerships can also be structured in other ways, including the "reverse freeze," and in combination with various other planning vehicles to achieve tax and non-tax objectives, including trusts such as QTIP trusts and CLATs, as part of a comprehensive plan to pass down wealth to future beneficiaries.

Listen as our experienced panel provides a thorough guide to the benefits, risks and structuring techniques of preferred freeze partnerships in estate planning.

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Outline

  1. Advantages of the freeze partnership over other techniques
  2. Understanding IRC 2701 provisions
  3. IRC Chapter 14 valuation issues
  4. Structuring the freeze to maximize basis step-up
  5. Drafting and structuring partnership transfer
  6. "Reverse" preferred partnership
  7. Use of preferred partnerships with various trusts
  8. Sample language and illustrations

Benefits

The panel will review these and other key issues:

  • Common structures of preferred partnerships
  • Freeze techniques and structures
  • Gift tax issues to avoid at formation
  • How not to run afoul of the valuation requirements in IRC 2710 and Rev. Rul. 83-120
  • Avoiding gain at formation resulting from contribution of assets into the preferred partnership
  • Utilizing preferred partnerships with trusts (GRATs, CLATs, QTIPs)
  • Reverse preferred partnerships
  • State and local income tax considerations
  • Recent Developments

Faculty

Baron, Andrew
Andrew L. Baron

Counsel
Meltzer Lippe Goldstein & Breitstone

Mr. Baron’s practice encompasses all phases of estate and income tax planning, business succession planning and...  |  Read More

Breitstone, Stephen
Stephen M. Breitstone

Partner
Meltzer Lippe Goldstein & Breitstone

Mr. Breitstone heads the Firm’s Tax Law Group that represents clients in Europe, Israel, South America,...  |  Read More

Macklin, Lawrence
Lawrence J. (Larry) Macklin
Managing Director & Wealth Strategies Advisor
Bank of America Private Bank

Mr. Macklin coordinates the development and delivery of innovative strategies and solutions for high net worth...  |  Read More

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