Taxes and Business Decisions 345of his taxable estate through gifts to his intended beneficiaries both faster and
at less tax cost than would other wise be possible, while at the same time re-
taining effective control over the assets given away. Were Morris interested in
implementing this strategy, he would form a limited partnership, designating
himself as the general partner and retaining all but a minimal amount of the
limited partnership interests for himself. He would then transfer to the part-
nership a significant portion of his assets, such as stock in the company, real es-
tate, or marketable securities. Even though he would have transferred these
interests out of his name, he would be assured of continued control over these
assets in his role as general partner. The general partner of a limited partner-
ship 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 remem-
ber that in each calendar year, Morris and his wife can combine to give no
more than $20,000 to each beneficiary before eating into their lifetime gift tax
exemption. The advantage of the family limited partnership, besides retaining
control over the assets given away, is that the amounts which may be given
each year are effectively increased. For example, were Morris and his wife to
give $20,000 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 se-
curities 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 secu-
rities, 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 dis-
counts 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 $20,000 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 inf lated value.
Of course, the IRS has challenged these arrangements when there was
no apparent business purpose other than tax savings or when the transfer oc-
curred 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 in-
centives 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