What are the tax consequences to terminating a defective family limited partnership. Can the tax cost be minimized. How do you terminate a family limited partnership.
First of all, before terminating it make sure that it really should be. There may be advantages to correcting the problems that exist and continuing an entity that has been in existence for years as compared to terminating it and starting over.
If you are really certain that it should be terminated, you need to first review the limited partnership agreement and the state limited partnership act (there usually not that long) as to the requirements and consequences of termination. Is there a mortgage or other debt on the partnership that may be affected by the termination? If a sizeable bank loan will be called as a result of the termination you may have more than just tax problems.
In most cases the termination will be accomplished by complying with the terms of the existing limited partnership (LP) agreement which might provide for a certain percentage of limited partners and all general partners to vote to approve the termination. Typically a termination document/agreement is prepared which addresses a range of issues including assets to be held in the LP pending final tax clearances, filing of final tax returns, compensation of the general partners, payment of the professional fees associated with the termination, and how assets will be distributed. For example, if the LP owns 4 parcels of real estate, does each partner receive a pro-rata share of each property, or will all parties agree to giving each parcel to a different partner, etc.
If a loan is relieved as part of the termination there could be adverse tax consequences. The actual tax consequences will depend on the nature of assets distributed. For example, "hot assets" (appreciated inventory, etc.) might trigger ordinary income. How much cash is distributed? Tax basis of each partner receiving a distribution and how that compares to the amount/value of assets (and the types of assets) distributed.
Subscribe to our email list to receive information on consumer webcasts and blogs, for practical legal information in simple English, delivered to your inbox. For more professional driven information, please visit Shenkman Law to subscribe.