In a recent case, the Tax Court allowed a gift tax annual exclusion for gifts of interests in a family limited partnership.

The gift tax annual exclusion is available only for gifts of present interest, not for gifts of future interest. A present interest is an unrestricted right to immediate use, possession or enjoyment of property or the income from property.

With many family limited partnerships (FLPs), including the FLP in this case, restrictions are imposed on the ability of a partner to transfer an interest in the partnership (Estate of George Wimmer et al. v. Commissioner, TC Memo 2012-157, June 4, 2012). In the Wimmer case, partners could transfer partnership interests to existing partners or their relatives.

However, before an interest could be transferred to an outsider, the other partners had to approve the transfer. Since the donees did not have an unrestricted right to transfer their partnership interest to others, the court determined that the gifts of partnership interests were not gifts of a present interest in the equity of the FLP.

The court then went on to determine whether partners who received the gifts had a present interest in the income from the partnership. The court determined that a present right to income exists if:

1. The FLP will generate income;
2. Some portion of that income would flow steadily to the recipients of the gifts; and
3. That portion of the income could be readily ascertained.

Since the FLP assets consisted of publicly traded, dividend-paying stocks, the court determined that the first test was met. With respect to the second test, the court concluded that the general partner had a fiduciary responsibility to distribute income to the limited partners and, in fact, made such distributions. Finally, the third test was met because the partners could estimate their share of the income by looking at the dividend history of the securities held by the FLP.

Not all gifts of interest in FLPs will qualify for the gift tax annual exclusion, which is currently $13,000 per year per donee, or recipient. But this case demonstrates one set of circumstances in which the gift tax annual exclusion was available.

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