Estate Planning and New IRS Centralized Partnership Audit Rules: Impact on Trusts Holding Partnership Interests

The new partnership audit rules, which allows the IRS to audit partnerships and assess tax at the entity level, will have a massive impact on trusts holding partnership assets. The widespread use of family partnerships, in particular, will require estate planning counsel and advisers to evaluate their wealth transfer structures to determine whether existing trusts face exposure to tax liabilities arising from prior years operations of partnership investment and business operations.

The new audit regime mandates entity-level audits and assessments of all businesses operating as partnerships and filing Form 1065. Under the rules, specific partnerships can elect out of the centralized audit process, as long as all partners are eligible. However, the regulation explicitly excludes trusts—whether revocable or irrevocable—from the definition of “eligible partners” who may opt out of the new audit regime.

The new rules would require partnerships, including tiered structures, to appoint a single representative to respond to audit inquiries and act on any assessments. Partnerships which are assessed tax must choose between paying an entity-level tax, or “pushing out” the adjustment to its partners, who must then recalculate their tax liabilities to account for their share of the assessment.

For trusts holding partnership assets, the inability to opt out of the new audit regime creates the potential for unforeseen and adverse tax consequences. Estate planning advisers must examine the structure of trust partnership holdings to avoid potentially costly tax exposure.

Listen as our expert panel provides a practical look at the estate planning challenges arising from trust ownership of partnership shares under the new centralized partnership audit rules.

1. Detailed discussion of new audit rule provisions
   1. TEFRA regime: audit implications at the partner level
   2. New rules: audits conducted and assessments made at the partnership level
   3. Opt-out provisions/procedures/limitations
2. Tax impact of new rules on trusts and family limited partnerships
3. Modifications and elections for existing partnerships holding trusts
   1. Selection of partnership representative
   2. Defining and limiting partnership representative’s authority to act
   3. Determining whether to make “push-out” election
4. Alternate procedures for partnerships seeking to opt out of entity-level assessments
5. Evaluating existing partnership structures in an estate plan
6. Impact on current estate plans and alternatives to partnerships in estate planning

The panel will review these and other key issues:

• The potential tax impact of the new centralized partnership audit rules on family partnerships and trusts which hold partnership assets as part of a wealth transfer plan
• Determining whether a family partnership is eligible for an election out of the centralized audit regime
• Necessary elections and changes to partnership operating documents, including selection of a partnership representative, limiting the scope of the representative’s authority and deciding whether to require pushouts of audit assessments as part of a revised partnership agreement
• Alternative strategies to minimize potential tax exposure under the new audit rules

Learning Objectives

After completing this course, you will be able to:

• Recognize the impact of the partnership audit rules on wealth transfer structures involving trusts that own partnership interests
• Discern whether an existing partnership structure is eligible for an election out of centralized audit procedures
• Determine necessary elections and actions needed to protect trusts holding partnership interests, particularly involving closely held businesses
• Identify strategies to minimize risk of negative tax consequences on trusts holding partnership assets

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization with supervisory authority over other preparers/accountants in preparing complex tax forms and schedules and preparing for partnership audits. Specific knowledge and understanding of partnership structures and operating agreements and IRS partnership audits. Familiarity with new partnership audit rules under the Bipartisan Budget Act of 2015.

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IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).