Trust and Estate Counsel

Tennessee Estate Planning Law

Insight and commentary on estate planning issues impacting affluent residents of Tennessee

Gifts of Limited Partnership Interests Qualify for Annual Exclusion Due to Regular Distributions

The Tax Court recently ruled that gifts of family limited partnership interests qualified for the gift tax annual exclusion, which is currently $13,000 per donee per year. Estate of George Wimmer involved a family limited partnership that was funded with marketable securities. Mr. Wimmer made gifts of limited partnership interests to children and trusts for grandchildren. The IRS disallowed annual exclusions for the gifts which forced Mr. Wimmer's estate to sue the IRS in Tax Court.

As is typical with limited partnership agreements, the Wimmer limited partners could not freely transfer their interests to third parties. Because the partners could not sell their interests, the Judge required the partnership to satisfy three income tests: (1) the partnership would generate income, (2) some portion of that income would flow steadily to the donees, and (3) that portion of income could be readily ascertained.  Because the Wimmer FLP had predictable income and made regular income distributions to its partners, the Judge allowed annual exclusions for the gifts.

This case is welcome news for taxpayers. Two prior cases decided by the Tax Court, Hackl and Price, had ruled against the taxpayer. The partnership in Hackl did not make distributions and the partnership in Price made irregular distributions. At least for now, the Tax Court has established a rule that the limited partnership must make regular income distributions in order for gifts of limited partnership interests to qualify for the gift tax annual exclusion.

When you desire to transfer a limited partnership interest, an LLC interest or stock that is not making regular income distributions, you should be aware that the IRS may challenge your qualification for the annual exclusion. You should consider making taxable gifts or sales of these interests and using your annual exclusion to make gifts of cash or other income-producing assets.