Family Limited Partnerships Not for Everyone

Q: Several weeks ago you wrote about family limited partnerships, a scheme you said was a hot new thing in estate planning. Does transferring real estate through these trigger a property tax reassessment under Prop. 13 in California? Also, do you know of a source of additional information of family limited partnerships? Neither my accountant nor my attorney knew much about them when I mentioned them. --T.R.

A: It’s not too surprising that your attorney and accountant weren’t well versed in family limited partnerships. Although these devices have been around for decades, it is only recently that they have come into a sort of vogue among estate planners for families with assets well into seven figures or families with illiquid business and real estate holdings they do not want included in their estates because the burden of estate taxes could require the sale of those assets.

In recent years, a handful of attorneys and accountants specializing in these plans have started covering them in the regular estate seminars they offer their clients and prospective clients. Some professionals have even begun specializing in them to the point that they offer seminars for other attorneys and accountants. Perhaps your advisers have heard about them through the continuing education materials they receive from their licensing groups.

One note of caution: Family limited partnerships are not for everyone and they can prove a costly extra expense if used in the wrong instances. For example, you can expect to pay an attorney thousands of dollars to establish the partnership; the state Franchise Tax Board also assesses partnerships an annual fee. Further, holders of less than 10% in a money-losing partnership may not get a tax benefit from the loss because such a small ownership stake is presumed to be a passive activity. You would be wise to consult a trusted legal or financial adviser before deciding that this is the appropriate vehicle for your estate. According to our experts, transferring real estate under a family limited partnership would not trigger a property tax reassessment under Prop. 13. Under California law, transfers of up to $1 million worth of real estate between parent and child are exempt from reassessment.

For those of you wishing more information about family limited partnerships, Owen Fiore, a San Jose attorney and accountant who often lectures about these deals, has sent me some materials to pass out to Money Talk readers. If you want this material, send a self-addressed, stamped envelope to Money Talk, Times Mirror Square, Los Angeles, Calif. 90053. This offer expires on Aug. 15.

Quit Claim Clears Names From a Deed

Q: When I purchased my house in 1986, I had to use my parents as co-signers to qualify for the loan. Now I am planning to refinance without my parents since I am able to qualify on my own. I have paid all the house payments and tax bills by myself since 1986. I would like to exclude my parents’ names from my home title and property tax bill. How can I do this? Will it affect my property tax bill? --J.D.W.

A: You can accomplish your goal simply by having your parents execute what it known as a “quit claim” to your home. This document says that they drop any claim they have to the property and leaves you in sole possession of it. These documents are available at title or escrow companies and should be filed with the recorder’s office in your county. Your parents’ quit claim to your home will have no effect on your property taxes because of allowances in Prop. 13 exempting real estate transfers of up to $1 million between parent and child.

On the Trail of ‘Secondary Market’

Q: I invested $20,000 in a limited partnership in 1979 and am now interested in selling it. I read that you can sell such investments on the “secondary market” but I don’t know how to contact anyone in this market.

What should I do? --J.M.D.

A: The “secondary market” is merely a generic name for the exchange of certain pre-owned--”used,” if you will--securities. The market doesn’t exist in any physical sense and you may gain access to it through most stock brokerages or the financial planner from whom you purchased the partnership. If you choose to use a stock brokerage, be sure to ask for their secondary markets department when you call.

Ex-Spouse Unclear on Social Security

Q: I just applied for benefits under my ex-husband’s Social Security. I thought that if we had been married 10 years and he was dead, I could collect 100% benefits at age 60. But the Social Security people tell me this is wrong. What is correct? --P.H.

A: If your ex-husband is dead and you had been married a minimum of 10 years, you are eligible to collect 71.5% of his benefits if you begin collecting benefits at age 60. If you wait until age 65 before drawing benefits on his account, you are entitled to the full 100%. By the way, the ex-spouse and the current spouse are both treated the same and are each entitled to draw equally on the deceased wage earner’s account. The fact that an ex-spouse is drawing benefits in no way affects the current spouse’s benefits.