Yes, you can donate partnership interests to a charitable remainder trust (CRT), but it’s a complex transaction with specific requirements and potential pitfalls that require careful planning with an experienced estate planning attorney like Ted Cook in San Diego. CRTs are irrevocable trusts that allow you to donate assets, receive an income stream for a set period or for life, and ultimately benefit a charity of your choice. Donating partnership interests can be a powerful estate tax reduction strategy, but it’s vital to understand the rules surrounding “in-kind” donations and the potential impact on the partnership itself. Roughly 65% of high-net-worth individuals utilize some form of charitable giving strategy, and CRTs are becoming increasingly popular due to their dual benefit of income and tax savings.
What are the tax implications of donating partnership interests?
Donating partnership interests to a CRT allows you to potentially deduct the fair market value of the interest, subject to adjusted gross income (AGI) limitations. For example, in 2024, the maximum deduction for charitable contributions is generally limited to 30% of your AGI for donations to public charities. However, for appreciated property like partnership interests, the deduction might be limited to 30% of your AGI calculated based on the property’s fair market value. It’s crucial to understand the “basis” of your partnership interest, which is generally the original cost plus any improvements. When the asset is sold within the CRT, any gain is generally not subject to immediate income tax, a significant advantage. The IRS scrutinizes these types of donations, so meticulous documentation and a qualified appraisal are essential.
What happens if the partnership agreement restricts transfer?
This is where things often get complicated. Many partnership agreements contain restrictions on the transfer of interests, either requiring consent from the other partners or prohibiting transfers altogether. If the partnership agreement prohibits transfers to an irrevocable trust like a CRT, the donation may be invalid for tax purposes. Ted Cook routinely advises clients to carefully review their partnership agreements *before* attempting to donate partnership interests. A key case illustrating this is *Estate of Newhall v. Commissioner*, where the Tax Court disallowed a charitable deduction because the partnership agreement prohibited transfers to trusts. “We’ve seen situations where clients assumed they could donate, only to discover the partnership agreement contained a clause that effectively blocked the transfer,” explains Ted. This can lead to a denied deduction and potential tax penalties.
I once worked with a client, Arthur, who owned a significant interest in a real estate partnership
Arthur was eager to utilize a CRT for estate tax planning, and he assumed his partnership interest would be an acceptable donation. He proceeded with the donation without first reviewing the partnership agreement. During the tax preparation process, his accountant discovered a clause stating that no partner could transfer their interest without the unanimous consent of all other partners. The other partners, understandably, were unwilling to consent to a transfer to an irrevocable trust that would remove Arthur’s voting rights and potential income stream. Arthur was ultimately denied the charitable deduction, and he faced significant tax liabilities. It was a painful lesson about the importance of due diligence.
But thankfully, we also helped Sarah, a local business owner, navigate this process successfully
Sarah owned a partnership interest in a thriving tech startup. She wanted to donate a portion of her interest to a CRT to support a local children’s hospital. Before proceeding, we meticulously reviewed the partnership agreement and discovered a clause requiring partner consent for transfers. We worked with Sarah to negotiate with the other partners, explaining the benefits of the donation, including potential positive publicity for the startup. After some discussion, the partners agreed to consent to the transfer, allowing Sarah to make the donation, receive an income stream, and ultimately benefit the hospital. It showcased how proactive planning and communication can lead to a successful outcome. “The key is to anticipate potential roadblocks and address them *before* they become insurmountable,” emphasizes Ted Cook. Furthermore, a well-structured CRT, combined with careful tax planning, can provide a lasting legacy for both your family and the charities you support.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
(619) 550-7437
Map To Point Loma Estate Planning Law, APC, a living trust lawyer: https://maps.app.goo.gl/JiHkjNg9VFGA44tf9
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