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Carried Interests: Optimizing Estate and Gift Tax, Addressing IRC Section 2701

Note: CLE credit is not offered on this program

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Friday, December 8, 2023

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This webinar will reveal methods to optimize estate and gift taxes on carried interests. The panelist will point out valuation issues to avoid, examples of optimal fund structures, and exceptions to IRC Section 2701 that can mitigate estate and gift taxes paid and the use of the unified credit on the carry of a general partner (GP).

Description

A GP's profits interest in a private equity fund, offered in exchange for services, is referred to as a carried interest. In addition to this interest, the GP will likely have a direct interest in the partnership and receive management fees. Partnership agreements for these funds commonly contain waterfall allocations that ensure that original amounts invested and preferred returns are distributed to other investors before any payment is made for the carried interest. These provisions optimize the value of the carried interest, which retains its potential to appreciate substantially, making these interests prime fodder for estate planning.

Since the current estate tax exemption, $12,920,0000 in 2023, will end in 2025, the need for estate planning for carried interests is imminent. Key to this planning is avoiding the impact of IRC Section 2701. This section can require that a gift of a carried interest also include the GP's other interests in the partnership, thereby negating the benefit of the transfer. There are planning techniques to avoid this inclusion. These include a valuation slice exception and the gift of a derivative, requiring a gift tax return to be filed. Trust and estate practitioners working with private equity fund investors must understand how to optimize transfer taxes paid for carried interests.

Listen as Anthony Venette, CPA/ABV, Business Advisory at DeJoy & Co., details strategies to lower estate taxes for GPs serving private equity funds.

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Outline

  1. Back to Basics: Gift & Estate Tax
  2. Back to Basics: Business Valuation
  3. Estate Tax Optimization
  4. Fund Structures
  5. Valuing Carried Interest
  6. Gifting Opportunities and Pitfalls
  7. Carried Interest Derivatives

Benefits

The panelist will review these and other critical issues:

  • Key considerations when selecting a valuation expert
  • How fund structures impact a carried interest
  • Addressing the reach of Section 2701 when gifting a carried interest
  • Using derivative contracts to transfer the value of a carried interest
  • Examples of specific estate planning techniques to optimize estate tax on carried interests

Faculty

Venette, Anthony
Anthony Venette, CPA/ABV
Business Advisory
DeJoy & Co.

Mr. Venette provides business valuation and advisory services to corporate and individual clients of DeJoy & Co. He...  |  Read More

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