Trusts and Estates
Ca. Trs. & Estates Quarterly 2018, Volume 24, Issue 2
Content
- 2017 Legislation: From Planning To Partnerships, Principal and Income To Proofs of Service: a Plethora of Promulgated Principles Practitioners Must Practice Proficiently
- After Winning the Battle, Winning the War: a Review of Attorney Fee Claims
- MCLE Article: the Evolution and Use of the Polst—Physician Orders For Life-sustaining Treatment—In California
- Tips of the Trade: How To Help Clients Avoid Taking Cryptocurrency To the Crypt
- Internal Revenue Code Section 2701 and Carried Interest Planning—the Basics
INTERNAL REVENUE CODE SECTION 2701 AND CARRIED INTEREST PLANNINGâTHE BASICS
By Genevieve M. Larson, Esq.* and Kenneth A. Pun, Esq.**
A key component of wealth transfer planning is understanding the valueâcurrent and futureâof an asset. That value is considered in deciding what to gift, when to gift, and what planning vehicle to use when gifting. Internal Revenue Code Section 2701 is a technical section that focuses on the value of intra-family transfers of interests in privately-held corporations or partnerships. Section 2701 can be a trap for the unwary transferor who does not take into account its provision when analyzing the value of a sale, gift, or exchange for adequate consideration.
If Section 2701 is applicable to a transfer, special valuation rules apply that differ from the standard test for fair market value under the willing buyer-willing seller rule.1 The effect of Section 2701 can greatly increase the value of a gift and, therefore, may result in a significant and unexpected transfer tax liability.
This article is designed to provide a basic understanding of Section 2701 to guide planners in determining whether Section 2701 applies to a particular transfer. It then provides guidance on techniques to avoid the application of Section 2701 generally, and for planning with funds and carried interests in particular. Finally, the article considers how these planning techniques can be used in conjunction with other more common estate planning techniques when planning with carried interests.