Can two people own a single interest in a partnership/LLC as joint tenants?
Friday, September 3rd, 2010 at
5:05 am
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Filed under: Estate Planning
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A husband and wife can generally own partnership interest or LLC membership as joint tenants. The exact answer is a matter of the state law governing the partnership and the partnership agreement or LLC operating agreement.
Most states use the Uniform Partnership Act with certain modifications. There is nothing in the Uniform Partnership Act which prohibits joint tenancy in a partnership. Your state law however may contain such a prohibition although it is not likely.
A partnership should have a carefully drafted partnership agreement and an LLC should have a good operating agreement. Either of these agreements may place limitations on ownership in the entity so they should be carefully consulted.
Some courts have addressed the issue of joint tenancy in partnerships and found that such ownership is permissible. There are two such cases in the source section although these are merely representative and not an exhaustive list. It’s just a couple examples.
As for taxation the issue is slightly different. If it is joint property then each of the joint tenants needs to properly report his or her share. See the CCH Master Tax Guide at Paragraph 709. If you are filing a joint return then that matter is fairly easy. In community property states the IRS has issued regulations regarding separate returns by husband and wife. The regulations are at IRS Reg. 1.702-1(d).
One other are that may shed some light on the matter is the regulations pertaining to partnership interest held by another. When a partnership interest is held by a nominee for someone else then the nominee must submit a statement to the partnership. The rules for this are contained in IRS Temp. Reg. 1.6031(c)-1T.
You make mention of estate planning concerns in question. I would highly advise consulting with a qualified estate planning attorney on these issues. You may accomplish your goals more effectively through other types of planning. You may be able to make use of a nominee, an LLC, various types of trusts, or transfer-on-death designations. The process could actually simplify things and manage to meet your estate planning desires.
OK, for non-probate transfer the joint ownership could work or you could also do a transfer-on-death on separate interest for each spouse. Each would name the other and there would be automatic transfer on the books of the company after death. See the Totten Trust case.
You could also elect to have the LLC managed by a manager rather than the members then the manager could act to sell or sign documents regardless of the membership interest. You could still be the manager you’d just act on behalf of the company as a manager rather than managing member. Its solves the problem of signing documents but not the issue of non-probate transfer.
Do not to forget to also consider the possibility of a Trust. You could also plan for disability of a spouse this way.
The IRS does have special rules relating to spousal interest in partnerships. It’s too much information to include here but it’s in 26CFR301.6231(a)(12)-1. Here’s the link: http://a257.g.akamaitech.net/7/257/2422/01apr20051500/edocket.access.gpo.gov/cfr_2005/aprqtr/26cfr301.6231(a)(12)-1.htm
This section on special rules deals with the treatment of ownership in the partnership and participation in proceedings. It is good information but not directly on point with regard to the K-1 question. I’m sure there is an answer but I’ve not located a perfectly on-point regulation. It appears that you may need to issue the two K-1s even though they will end up on the same joint return. I’ll be interested to see if someone can help us verify this issue. I can see the simplicity in a single K-1 but if they are the same then there shouldn’t be too much difficulty in printing it a second time with a new social security number.
I’ve now found an actual IRS reference to a joint partnership interest with one K-1 but it still does not provide advice on completely the schedule. The reference is in their Audit Technique Guide to TEFRA (Tax Equity & Fiscal Responsibility Act of 1982) partnerships.
The quote is:
A husband and wife, each having their own partnership interest (separate Schedules K-1) are considered one partner, irrespective of their filing status. A jointly held interest (one K-1) also qualifies as one partner for purposes of the count. (Sections 6231(a)(1)(B) & (12) and Reg. 301.6231(a)(1)-1(a)(1) and Temp. Reg. 301.6231(a)(1)-1T(a)(1)).