Using Limited Partnerships To Bridge International Borders

Planning for an estate that spans multiple international jurisdictions is challenging. One of the hardest aspects is to create a structure that allows family members to control the family assets in each jurisdiction without unnecessary disruption from incapacity or death. Not every country recognizes trusts as a legal entity. Even when trusts are recognized in the foreign jurisdiction, the taxation of the trust in the United States and the foreign country are often quite different, and not always in a good way. Thus trusts, widely used as they are in the United States, are not always a good option in the international context.

Many, though certainly not all, foreign jurisdictions, however, recognize some form of limited partnership. This is especially true in common law countries (i.e. those based on British law) and countries in Western Europe. Additionally, the taxation of limited partnerships in many, though certainly not all, foreign jurisdictions is similar to that in the United States–at least from the perspective that the partners, rather than the partnership, are subject to taxation. This is often in contrast to corporations, which are usually subject to two levels of taxation: one at the corporate level and a second at the shareholder level upon the corporation paying dividends, and therefore do not always offer an income tax efficient option.

A limited partnership typically consists of a general partner who holds all substantial management authority as well as legal liability for the partnership and at least one limited partner who does not participate in substantial management decisions and holds no legal liability for the partnership. Of course, exceptions to these principles exist. Those are beyond my scope here.

If a key family member contributes property to a limited partnership that is taxed the same in both countries, the limited partnership can often hold title to property in multiple jurisdictions with no additional level income tax other than at the partner level. If there are at least two partners, and the partners’ interests are held in a way that death or incapacity of a partner does not cause a loss (even temporarily) of the management control of the partnership property, the limited partnership can act as a convenient way to manage the partnership property. This can be the case even though the partnership property is widely disbursed geographically.

For example, assume Wendy, a United States citizen, owns property in Canada. She could form a limited partnership in the United States, naming her United States revocable trust as the 1% general partner and 98% limited partner, and then the herself or her children as the remaining 1% limited partner. Wendy could then hold title to Canadian property within the partnership and would be protected from the need for a Canadian proceeding should she become incapacitated or die, because ultimately the trustee of her revocable trust controls the partnership and that person could be named in the trust agreement. Thus, if Wendy became incapacitated, the successor trustee could step into her shoes seamlessly, without the need for a court proceeding. The successor trustee could then take any actions Wendy could have taken herself, including selling, leasing, or distributing partnership property.

Other concerns, such as transfer taxation, the tax on contributions of property to a partnership, reporting requirements of foreign property ownership, and liability protection, among others, are also important. Thus, a limited partnership cannot be used in the way described above without careful thought. In the right circumstances though, a limited partnership can offer a useful estate planning bridge across borders.

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