To understand virtually all planning techniques, the planner needs to understand the four basic parts of almost every asset that can be appropriately divided in the planning process. These components are:
Control Often the most important element to the client is the ability to control the asset. For example, a general partner owning only a 2% interest in a family limited partnership may still control its operations, but may not have a significant portion of the allocated income, current equity, or future appreciation generated by the LP’s assets.
Income The donor often wants to retain the right to receive income and other present benefits from the asset. For example, the recipient of a charitable remainder annuity trust has a right to income, but may not share in the current equity, or future appreciation.
Current Equity The current equity value of the asset (i.e., what the owner would receive if the asset were sold) is the third element. While a general partner may control a family partnership with a 2% equity share, the vast majority of the partnership’s current equity value is normally owned by the limited partners.
Future Appreciation With effective transfer tax rates ranging from 41% to 50% (in 2002), a major part of tax planning should be to transfer future appreciation out of the estate to avoid an increasing transfer tax burden and the resulting liquidity demands.