Hi all,
We have a new member who has asked if her shares can be in
the name of her trust. Our PA says no, but I can't remember
why this is. Our original PA was based on the BI agreement,
with changes recommended by Bivio years ago. Can someone
refresh my memory? Thanks

When the choice was between not being able to opt out of the
centralized audit and having to put the decedent's share of
the partnership through probate, my club chose avoiding
probate and allows members to hold their partnership
interest in a revocable trust. For some members that was
nonnegotiable as the partnership interest would be the only
asset requiring probate. When deciding whether to allow
interests in the partnership to be held in a revocable
trust, you must consider the effect on attracting new
members.

I have just completed the transfer of the second largest
partnership interest owed by a partner who died in
September. His interest was held in a revocable trust. The
withdrawal and transfer of shares to the trust went smoothly
and the beneficiaries have avoided probate.

One lesson I have learned applies to all partnerships
whether held individually or in a trust. The wording of our
partnership agreement treats withdrawal caused by death the
same as withdrawal by a living partner. That is to say, the
death is treated as a notice of withdrawal accepted at the
next meeting and then valued at the following monthly
meeting. This means there can be 31 to 59 days between the
date of death and date of valuation. During this time, the
value of the partnership interest will change, perhaps in a
significant amount. For a living individual, the additional
income from dividends, interest, and capital gains realized
by the partnership are included in the normal K-1. Any
increase in the value of the partnership interest is
included in the withdrawal report. But for a withdrawal
caused by a death, it becomes more complicated.

Whether there is a trust or a probate, the owner of the
partnership interest during the time between date of death
and withdrawal valuation is not the individual, but a new
entity (non-revocable trust or probate estate) with a new
tax identification number. Interest, dividends, realized
capital gains of the partnership occurring between the date
of death and withdrawal valuation is reportable by the trust
or probate estate. In addition, the increase in value of the
partnership interest between the date of death and
withdrawal valuation is reportable by the trust or probate
estate. In my recent case, the combined amount exceeded
$6,500, not chump change to be ignored in the Investment
club's reporting to the IRS.

 It was easy enough to perform a withdrawal on the date of
 death to the suspense account. Then create a new member
 account in bivio for the trust with its new TIN funded from
 the suspense account. This maneuver accounted for the
 stepped-up basis. Then after the withdrawal valuation date
 passed, I performed a normal withdrawal of the trust
 account.

But these extra steps can be avoided by changing the wording
of the partnership agreement to have the date of death be
the valuation date of the withdrawal and eliminating the
step of treating the death as a notice of withdrawal that is
accepted at the next meeting.

The delayed withdrawal valuation date for a living partner
makes sense to avoid timing of the market. That concern does
not apply in a death situation. Making the day of death the
withdrawal valuation date makes all the income attributable
to the dead partner included in one K-!, and the heirs or
trust beneficiaries receive notice of the stepped-up basis
value in the withdrawal report without the treasurer having
to prepare two K-1s and withdrawal reports.

Changing the wording of the partnership agreement eliminates
any questions about how post-death income needs to be
reported by the investment club.

Jack Ranby, Treasurer, Grants Partners.

Good advice! What’s the impact of not being able to opt out of the centralized audit?
 
Sent from my iPhone
 
> On Nov 17, 2024, at 9:30 PM, John W Ranby Trustee PGM Cariboo Trust via bivio.com <user*15792700001@bivio.com> wrote:
>
> When the choice was between not being able to opt out of the
> centralized audit and having to put the decedent's share of
> the partnership through probate, my club chose avoiding
> probate and allows members to hold their partnership
> interest in a revocable trust. For some members that was
> nonnegotiable as the partnership interest would be the only
> asset requiring probate. When deciding whether to allow
> interests in the partnership to be held in a revocable
> trust, you must consider the effect on attracting new
> members.
>
> I have just completed the transfer of the second largest
> partnership interest owed by a partner who died in
> September. His interest was held in a revocable trust. The
> withdrawal and transfer of shares to the trust went smoothly
> and the beneficiaries have avoided probate.
>
> One lesson I have learned applies to all partnerships
> whether held individually or in a trust. The wording of our
> partnership agreement treats withdrawal caused by death the
> same as withdrawal by a living partner. That is to say, the
> death is treated as a notice of withdrawal accepted at the
> next meeting and then valued at the following monthly
> meeting. This means there can be 31 to 59 days between the
> date of death and date of valuation. During this time, the
> value of the partnership interest will change, perhaps in a
> significant amount. For a living individual, the additional
> income from dividends, interest, and capital gains realized
> by the partnership are included in the normal K-1. Any
> increase in the value of the partnership interest is
> included in the withdrawal report. But for a withdrawal
> caused by a death, it becomes more complicated.
>
> Whether there is a trust or a probate, the owner of the
> partnership interest during the time between date of death
> and withdrawal valuation is not the individual, but a new
> entity (non-revocable trust or probate estate) with a new
> tax identification number. Interest, dividends, realized
> capital gains of the partnership occurring between the date
> of death and withdrawal valuation is reportable by the trust
> or probate estate. In addition, the increase in value of the
> partnership interest between the date of death and
> withdrawal valuation is reportable by the trust or probate
> estate. In my recent case, the combined amount exceeded
> $6,500, not chump change to be ignored in the Investment
> club's reporting to the IRS.
>
> It was easy enough to perform a withdrawal on the date of
> death to the suspense account. Then create a new member
> account in bivio for the trust with its new TIN funded from
> the suspense account. This maneuver accounted for the
> stepped-up basis. Then after the withdrawal valuation date
> passed, I performed a normal withdrawal of the trust
> account.
>
> But these extra steps can be avoided by changing the wording
> of the partnership agreement to have the date of death be
> the valuation date of the withdrawal and eliminating the
> step of treating the death as a notice of withdrawal that is
> accepted at the next meeting.
>
> The delayed withdrawal valuation date for a living partner
> makes sense to avoid timing of the market. That concern does
> not apply in a death situation. Making the day of death the
> withdrawal valuation date makes all the income attributable
> to the dead partner included in one K-!, and the heirs or
> trust beneficiaries receive notice of the stepped-up basis
> value in the withdrawal report without the treasurer having
> to prepare two K-1s and withdrawal reports.
>
> Changing the wording of the partnership agreement eliminates
> any questions about how post-death income needs to be
> reported by the investment club.
>
> Jack Ranby, Treasurer, Grants Partners.

Molly asked: "What is the impact of not being able to opt
out of the centralized audit?"

A centralized audit means the IRS can issue an assessment
and collect owed taxes, penalties, and interest from the
partnership itself.

If a partnership is eligible to and does opt out of a
centralized audit, the IRS must audit each partner
separately, and collect the pro rata tax, penalties, and
interest from each partner separately.

If a partnership subject to a centralized audit pays the IRS
from partnership assets, and all the partners in the tax
year for the assessment and year of collection are the same,
the partnership by contract can allocate the IRS debt among
the partners so there is no different fiscal impact. If
there are differences in the make-up of the partnership
between the two years, then the partnership would have to
collect from the departed partners by contract and agree to
hold new current partners harmless.

Not being eligible for a centralized audit can add some
administrative burdens to the partnership and the partners.
However, if transactions are entered accurately and
faithfully into bivio, and bivio software is used to create
the annual tax returns and K-1s; the risk of an assessment
from an audit is extremely low.

Jack Ranby