Estate Planning for Private Equity: What’s There to Know?

The new generation of private equity managers has come to the scene. These managers are in the unique position to leverage gifts, by transferring the wealth to younger family members, and produce great tax savings.

Basically, they are using their giving as a way to unlock gifts. The only problem is that managers of private equity funds focus all their energy on seeking financial support and launching the fund. They pay very little attention to estate planning, which is a huge mistake. Have you spent time thinking about making multi-generational gifts? Chances are that you have not. In this article, you have everything there is to know about estate planning for private equity.

Estate and gift taxes

People have the right to gift during their lifetime or hand down at the moment of their death. If no money is exchanged during the transfer process, then it is considered a gift tax in the eyes of the Internal Revenue Service. If you have accumulated substantial wealth, you need to act immediately. Insurance and Estates recommends transferring the assets to offspring or other family members so that the assets do not become part of the taxable estate. As long as the gift is below the annual limit – $14,000 – no tax is owed by either party. It is this low value that makes the gifting vehicle so popular. Attention needs to be paid to the fact that the gift is irrevocable.

Various types of trusts are available for tax break carried interests

Don’t waste any more time and get started on an estate plan that included gifts to descendants. Start with transferring a small percentage of the interest rate to a trust. Thanks to the gift carried interests, you will be able to share the profits of the private investment fund. Many types of trusts are appropriate for the strategy that you are implementing. Examples include defective grantor trusts and grantor retained annuity trusts. Both of them can be used in order to transfer assets from an estate in a tax-efficient way.

Avoiding trouble when transferring carried interests

When estate planning is concerned, it is important to pay attention to interest rates. There are risks, especially for newly founded funds. The carried interests are a small class of equity, but that does not mean that you should rush into making valuation assumptions. What can happen is that the Internal Revenue Service will challenge those assumptions, especially if the proceeds is speculative in nature. Should the transfer of interest not be carried out correctly, the results are disastrous. There are many methods that can be used for transferring the interests, such as sale of interest and cash-settled options.

Tax complexities to take into account

As you can imagine, there are many aspects to take into account. Instead of bestowing a gift on somebody in a direct manner, you might want to think about gifting that person indirectly. Complications generally occur when the strategies used are too aggressive. The point is that, try as you might, you might not be able to avoid complications. If you do get into trouble it is a good idea to get an estate planning attorney to help you.

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