Use Of The Annual Exclusion For Transfers Of Interests In Family Entities

The use of business entities—limited partnerships, closelyheld corporations and limited liability companies—offers clients ease of management, protection from creditors and, of course, benefits in the intrafamilial transfer of assets.

However, as utilization of the annual gift tax exclusion is often an important component of intergenerational transfer plans, the decision of the 7th Circuit Court of Appeals in Hackl v. Commissioner obliges practitioners to review the alienation restrictions inserted in governance agreements of entities used for intrafamilial transfers to ensure that the transferred interests are, in fact, present interests under recent judicial guidance.

The use of the annual gift tax exclusion is, subject to certain exceptions, limited to gifts of a present interest. The IRS defines a present interest as “an unrestricted right to the immediate use, possession, or enjoyment of the property or income from the property” and thus excludes other interests or estates that “are limited to commence in use, possession, or enjoyment at some future date or time.”

The IRS approaches intergeneration transfers of limited partnership units,

Read Related Publications