In the effort to shield assets from excessive taxation both during and after an individual’s life, some in Ohio turn to limited family partnerships. This little-known estate planning tool can give families the flexibility needed to retain control over their accumulated wealth, while also preserving assets to pass down to children and grandchildren. The Internal Revenue Service, however, may have this approach within its crosshairs, and the benefits of a limited family partnership could lessen or disappear completely in the months ahead.

For now, a limited family partnership is an excellent way to reduce taxes for families who have accumulated a high degree of wealth. In structuring such a partnership, an individual or couple creates an entity that will “own” a family business. The rules are lenient enough that even a business that exists solely to manage a family’s securities portfolio can qualify.

Once the entity is properly structured, children and grandchildren are given limited interest partnerships in the business. Because these interests are limited, they hold a decreased value. That translates into a lower tax bill. The assets are, therefore, effectively removed from the original owner’s estate, but are also not fully held by the eventual heirs.

Comments made by government tax officials suggest that the benefits of limited family partnerships may soon come to an end. By eliminating the tax discounts that are granted based on the lack of control and limited marketability of limited partnerships, the structure may be far less appealing to many families. For those in Ohio who are interested in protecting their assets for future generations, a different estate planning approach may be necessary in the months ahead.

Source: The Wall Street Journal, “IRS Takes Aim at an Estate-Planning Strategy“, Liz Moyer, June 26, 2015