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With proper planning, transfers of family assets from one generation to the next can occur at discounted rates. As a general rule, the IRS allows one individual to give another individual a gift of $13,000 per year (at this writing).

Any gifts valued at over $13,000 are subject to a gift tax starting at 18 percent. In the estate planning arena, senior family members may be advised to give assets away during their lifetimes so that estate taxes of up to 55 percent are minimized.

By using a limited partnership for the management and gifting of family assets, gifting can be accelerated with an IRS-approved discount. As discussed, because limited partnership interests do not entitle the holder to take part in management affairs and are frequently restricted as to their transferability, discounts on their value are permissible. In other words, even if the book value of 10 percent of a certain limited partnership is $16,000, a normal investor wouldn’t pay that much for it because, as a limited partner, they would have no say in the partnership’s management and would be restricted in their ability to transfer their interest at a later date. So, instead of valuing that limited partnership interest at $16,000, the IRS recognizes that it may be worth more like $13,000.

The advantage of this recognition comes into play when parents are ready to gift to their children. Assume a husband and wife have four children. Each spouse can gift $13,000 per year (at this writing) to each child without paying a gift tax. As such, a total of $104,000 can be gifted each year (two parents times four children times $13,000). With the valuation discount reflecting that the $16,000 interest is really only worth $13,000 to a normal investor, each parent gifts a 10 percent limited partnership interest to each child. Their combined gifts total an $104,000 valuation, thus incurring no gift tax. However, of the partnership valued at $160,000 they have gifted away 80 percent of the limited partnership with a book value of $128,000. Had they not used a limited partnership they would have had to pay a gift tax on the $24,000 difference between the $104,000 discounted gifted value and the $128,000 undiscounted value of eight $16,000 10 percent partnership interests that were gifted. (I know this may seem complicated. Please do not worry—it is complicated. Feel free to come back to it later, or not at all.)

The key point to remember is that transfers of family wealth can be accelerated through the use of limited partnership discounts. Once this technique is appreciated, the question always becomes: How much of a discount will the IRS allow? Is it 25 percent, 35 percent, or can you go as high as 65 percent? While there is no bright-line test or number, the simple answer is found in this maxim: Pigs get fat, hogs get slaughtered. If you get greedy with your discounting, the IRS will call into question all of your planning. In my practice I do not advise my clients to go over a 33 percent discount.

The IRS has been questioning cases where the discounts are above that percentage. That said, the 33 percent limit may be conservative. I have dealt with some professionals who with certainty assert that higher discounts are easily justified. Again, there is no correct answer. You and your advisor should establish your own comfort level.