In Summary
Investment professionals with carried interest rights possess distinct opportunities for wealth transfer. Carried interest, being speculative in nature, offers the chance to leverage asset transfers at low valuations for assets expected to appreciate significantly. These opportunities are especially notable now due to The Tax Cuts and Jobs Act, which have effectively doubled the lifetime exemptions for gift and estate taxes, as well as the generation-skipping transfer tax (GSTT) exemptions, compared to those before the law’s enactment. The temporarily heightened exemption levels allow a unique opportunity to shift greater amounts of additional wealth to future generations through various strategies and types of trust vehicles.
Key Takeaways
- This Insight delves into the typical structure of a private equity fund, the distribution waterfall that governs asset distribution from a fund, and the factors affecting the valuation of private equity interests.
- Section 2701 of the Internal Revenue Code outlines potential risks for carried interest equity owners transferring wealth to family members or trusts for their benefit. To prevent unintended gift tax implications during the transfer of carried interest, it is crucial not to breach Section 2701 by adopting approaches such as vertical slice planning and appropriate transfer structuring.
- Furthermore, this Insight discusses wealth transfer strategies that Rockefeller Private Advisors can implement to structure a transfer without violating Section 2701 valuation rules. These include making gifts or sales to an intentionally defective grantor trust, setting up grantor retained annuity trusts, and establishing beneficiary defective irrevocable trusts. It also examines the use of derivative contracts and parallel investments alongside the fund’s investments.