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general partner of a limited partnership exercises all management functions; limited partners sacrifice
all control in exchange for limited liability.
Morris would then embark on a course of gifting portions of the limited partnership interests to
Lisa, Victor, and perhaps even Brad. You will remember that Morris and his wife can combine to give
no more than $26,000 to each beneficiary each calendar year before eating into their lifetime $1
million gift tax exemption. The advantage of the family limited partnership, besides retaining control
over the assets given away, is that the amounts that may be given each year are effectively increased.
For example, were Morris and his wife to give $26,000 of marketable securities to Lisa in any given
year, that would use up their entire annual gift tax exclusion. However, were they instead to give Lisa
a portion of the limited partnership interest to which those marketable securities had been contributed,
it can be argued that the gift should be valued at a much lower amount. After all, while there was a
ready market for the securities, there is no market for the limited partnership interests; and while Lisa
would have had control over the securities if they had been given to her, she has no control of them
through her limited partnership interest. These discounts for lack of marketability and control can be
substantial, freeing up more room under the annual exclusion for further gifting. In proper
circumstances, one might use this technique when owning a rapidly appreciating asset (such as a pre-
IPO stock) to give away more than $26,000 in a year, using up all or part of the lifetime exclusion, to
remove the asset from your estate at a discount from its present value, rather than having to pay estate
tax in the future on a highly inflated value.
The IRS has challenged these arrangements when there was no apparent business purpose other
than tax savings, or when the transfer occurred just before the death of the transferor. And you can
expect the IRS to challenge an overly aggressive valuation discount. But if Morris is careful in his
valuations, he might find this arrangement attractive, asserting the business purpose of centralizing
management while facilitating the grant of equity incentives to his executive employees.
Buy-Sell Agreements
Short of establishing a family limited partnership, Morris might be interested in a more traditional
arrangement requiring the corporation or its stockholders to purchase whatever stock he may still hold
at his death. Such an arrangement can be helpful with regard to both of Morris‟s estate-planning goals:
setting a value for his stock that would not be challenged by the IRS and assuring sufficient liquidity
to pay whatever estate taxes may ultimately be owed.
There are two basic variations of these agreements. Under the most common, Morris would agree
with the corporation that it would redeem his shares upon his death for a price derived from an agreed
formula. The second variation would require one or more of the other stockholders of the corporation
(e.g., Lisa) to make such a purchase. In both cases, in order for the IRS to respect the valuation placed
on the shares, Morris will need to agree that he will not dispose of the shares during his lifetime
without first offering them to the other party to his agreement at the formula price. Under such an
arrangement, the shares will never be worth more to Morris than the formula price, so it can be argued
that whatever higher price the IRS may calculate is irrelevant to him and his estate.
This argument had led stockholders in the past to agree to formulas that artificially depressed the
value of their shares when the parties succeeding to power in the corporation were also the main