3. Should a partnership interest be transferred during life or at death?

Another estate planning issue that arises involves transferring a partnership interest. Assets given away during life generally retain the transferor’s basis, while assets transferred after death receive either a step-up or a step-down in basis. If a partnership interest is given away during life and it appreciates in value, the growth is outside the transferor’s taxable estate, but the beneficiaries may have capital gain and ordinary income to report due to a lower basis.

If the partnership interest has a negative capital account when gifted, there can be adverse tax consequences. If the asset is held until death and receives a step-up in basis, capital gain and ordinary income related to the activity during life are eliminated. There is also an opportunity for beneficiaries to benefit from additional deductions, such as depreciation, if the partnership makes a certain election.

Planning point: Weigh whether it is more beneficial to transfer a partnership interest during life or at death. Ensure there are no unintended adverse income tax consequences related to the transfer to ultimate beneficiaries. Additional rules and complexities govern charitable contributions of partnership interests, which may result in unintended tax consequences.