Opting Out? The Estate Planning Conflict with the BBA
May 20, 2024 - Publication
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The Bipartisan Budget Act of 2015 (the “BBA”) enacted the centralized partnership audit regime for tax years beginning after December 31, 2017. All entities taxed as a partnership are subject to these complex rules unless the partnership affirmatively elects out (and is eligible to do so) on a timely filed Form 1065, including extensions, on an annual basis. Electing out of the BBA is a common recommendation among tax return preparers, especially for smaller family-owned partnerships.
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Another common recommendation by attorneys and CPAs is contributing the ownership of a family-owned partnership into the partner’s revocable trust (a grantor trust) to avoid probate. However, a partnership can elect out of the BBA only if all its partners are “eligible partners” (e.g., individuals, C corporations and S corporation, if other requirements are satisfied). The change in legal ownership from an individual to a trust, even a grantor trust, eliminates the ability of the partnership to elect out of the BBA because Reg. §301.6221(b)-1(b)(ii)(B) states that a “trust” is not an eligible partner. Neither the Code nor the regulations distinguish between grantor and nongrantor trusts, making all trusts ineligible partners for electing out of the BBA. The partners must now choose between avoiding probate by contributing their partnership interests to their revocable trust or electing out of the BBA.
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By way of example, Amy and Bob are siblings who equally own AB LLC, a limited liability company taxed as a partnership. Since 2018, AB LLC has elected out of the BBA rules each year on its timely filed Form 1065. During 2024, Amy followed the recommendation of her attorney and contributed her interests in AB LLC to the Amy Revocable Trust. As long as the LLC interest is held by Amy’s Revocable Trust, AB LLC will be subject to the BBA in that it has an ineligible member.
