May 1, 2011 12:00 PM

They come in different flavors; and provide a menu of creative planning solutions

By N. Todd Angkatavanich & Edward A. Vergara

Preferred partnerships (Pps) are very useful and versatile estate planning vehicles that have been around for decades, yet still appear to fly under the radar. From an economic perspective, a PP is often well-suited to act as a multi-generational family investment vehicle; older generations are typically seeking a steady income flow and protection of capital, while younger family members are often willing to forego current income and capital security for the prospect of capturing upside growth. Much as one balances an investment portfolio between fixed income and equities based upon the particular needs at a given stage of one's life, a PP can provide for such a division of economic interests within a private investment vehicle. From an estate planning perspective, these partnerships are sometimes referred to as “freeze partnerships,” because they provide a structure that enables one class of partnership interests, typically held by a senior generation family member, to be “frozen” or limited to a fixed rate of return, thereby enabling the future appreciation in excess of that fixed rate to inure to the benefit of the other class of partnership interests, typically held by younger generations or trusts for their benefit. As with many estate freeze techniques, such as grantor retained annuity trusts (GRATs) or sales to grantor trusts, the freeze partnership is an attractive estate planning technique because, if structured properly, it may be implemented with the use of little or no lifetime gift tax exemption.

Practitioners can augment the “vanilla” PP structure by using it in conjunction with other planning techniques, such as qualified terminable interest property (QTIP) trusts, GRATs and charitable lead annuity trusts (CLATs), in which the growth of assets in a tax-inefficient trust can be contained in favor of growth occurring in other more tax-efficient trusts. Additionally, a PP can be very useful in less traditional types of planning arrangements, such as planning with transfers of fund carried interests, planning to minimize the draconian “throwback rules” applicable for foreign non-grantor trusts and planning to minimize growth of assets in a C corporation.

Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
2010 Tax Act News	Industry Trends Surveys

E-Newsletter Signup

Poll

Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
2010 Tax Act News	Industry Trends Surveys

E-Newsletter Signup

2011 Trust Glossary

Click here to download the 2011 Trust Glossary

50 Years Ago This Month

Click here to read the issue.

50 years ago, in May 1962, we featured articles such as: "Future of Canadian Trusteeship" by Arthur H. Mingay", "Training Trust Employees" by Ian M. Marr, "What is a Trust Officer?" by Eric J. Brown, and "Selling Services" by Donald I. Webb.

Conrad Teitell's Guide to Tax Benefits For Charitable Gifts

Click here to view the most up to date guide (September 2011)

Press Releases