The IRS has issued regulations concerning the estate planning benefits of family partnership. These regulations can affect asset protection planning because they reduce the effectiveness of estate planning rationale for transfers of non-exempt assets in to family partnerships. The IRS proposed regulations were discussed in an article in the Wall Street Journal.
Limited partnerships can be used for asset protection because the creditor remedy against a debtor’s limited partnership interest is restricted to a charging lien against distributions, if any. If the partnership distributes nothing the judgment creditor gets nothing. Contributions of non-exempt assets to a partnership could be challenged as a fraudulent transfer. Debtors sometimes plan to defend against these fraudulent conveyance attacks by explaining that they transferred assets to their family partnership for “estate planning.” But, these debtors need to explain the estate planning benefit sought with their partnership.
The Wall Street Journal article explains that family partnerships have been utilized to reduce estate tax liability. The IRS regulations would reduce the estate planning benefit for many taxpayers. For those excluded taxpayers, the estate planning rationale of holding assets in a partnership will be reduced according. The estate planning defense against fraudulent conveyance attacks against family partnership asset protection is going to be lessened as the IRS regulations undermine the estate tax benefit for many taxpayers.
Those people considering using a family partnership for asset protection should transfer their assets in to a partnership before the IRS proposed regulations become effective.