Family partnership agreements will have some important tax implications:
Gift Tax
When you donate interest in your timberland, it is considered to be a gift that is subject to the annual exclusion tax credit. The annual exclusion is $10,000 per recipient, or $20,000 if spouses make a joint gift. A gift tax would be paid only if the exclusion is exceeded.
Estate Tax
The unified estate credit is the value of your estate that is exempt from taxes. In December 2010, a tax package became law which carried a 35% tax on estates over $5 million ($10 million unified credit per couple). For more about the estate tax, see our Estate Planning page.
Income Tax
The contribution of the timberland to the partnership generally does not result in a taxable gain to the parents. Income from timber sales is distributed to each partner's allocation percentage, as determined by their ownership interest and other contributions. Each partner is liable for the tax on his or her share of the timberland partnership.
Basis Rules
The basis is the original and other costs of an asset. As with all gifts, the basis of the donor is carried over to the recipient, in this case the partnership. This may be a problem if the timberland is highly appreciated at the time the partnership agreement is established because the tax liability on the unrealized gain is spread among the partners.
Built-in Gains
If the parents' basis in the timberland is less than its fair market value when the timberland partnership is established, there is a built-in gain. If some portion of the property is sold within 5 years of the partnership agreement (i.e., timber sales), the gain may be taxable to the parents, rather than distributed among partners. As always, check with your attorney and an estate planning advisor for advice on your specific situation.
