Family Office 4.0
Editorial

The Gatta Doctrine

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HOW TO EQUIP BENEFICIARIES  FOR ACTIVE ROLES IN YOUR FAMILY LIMITED PARTNERSHIP?

Consider “The Gatta Doctrine of Member Participation”;
The better their views, the stronger their voices.

With Family Limited Partnerships,  clear views make strong voices. Parents keen to involve their children in Family LPs owe them transparency; real-time views of contributions, investments, rates of return, liquidity, and liabilities – without which, members lack the means to get involved. It’s cause and effect: no view, no voice.

Designed to preserve generational wealth, Family Limited Partnerships (FLPs) are powerful estate-planning tools that enable tax-efficient transfers of business interests, real estate, and other assets from one generation to the next.Family Office Handbook

They are surging in number and for good reason.

Legislative proposals that are up for congressional consideration are likely to raise taxes on HNW families as early as Q1 of 2022. If adopted, they would:

  • Double the long-term gains tax rate from 20% to 39.6%.
  • Eliminate the stepped-up basis provision, which steps up the fair market value on the cost basis of an inherited asset.
  • Eliminate Family LP valuation discounts, which reduce the taxable value of limited partnership interests gifted at death.
  • Slash the gift/estate tax exemption 70%, from $11.7M to $3.5M.

What can families do between now and year-end to lessen the bite that 2022 is likely to bring? Consider gifting business interests, real estate, and other assets to beneficiaries through a Family LP. And the sooner the better because the loss of valuation discounts is a real possibility. And because a 70% cut in the gift/estate exemption would be permanent. Use it or lose it.

The Legacy Benefit

An FLP can also serve as a tool to teach children and grandchildren to manage the family business or other assets of the partnership. But this comes with a caveat: Parents keen to involve their children in evaluating investments and suggesting alternatives owe them transparency – real-time views of contributions, investments, rates of return, liquidity, and liabilities.

Wonder, how members might use this information to offer valuable insights  to the partnership? Consider the example of “Jones Family LP,” where the Father contributes low-basis Amazon shares; the brother contributes numerous properties in the Florida Keys; and the sister contributes cash. The beneficiaries may find cause for concern in the high concentration of tech stocks, the tendency of hurricanes to pummel Florida every fall, and how selling their respective investments would affect the sister’s children (minimal capital gain) and the brother’s children (federal and state taxes).

When the Assets are extensive, there’s no Transparency without Technology

This is precisely why Tandem Wealth Consultants uses the Asset Vantage platform to offer beneficiaries real-time views of their respective risk exposure, tax situation, and liquidity. We use it to offer transparency into who contributed what, and when; track tax basis; determine future liquidity by projecting capital calls and private equity distributions based on prior history; and, most of all, view rates of return by security every day, and compare them to benchmarks.

It’s all to equip beneficiaries to offer actionable input. Indeed, the better their views into the partnership, the stronger their voices during decision making.

This article was contributed by Rita Gatta of Tandem Wealth Consultants, an Asset Vantage customer.

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