Estate Planning: Limiting Tax Liability When Transferring a Partnership

Published on: Nov 02, 2023 by Eric Trost, CPA, MST

Updated on: May 30, 2025

Transferring a partnership to heirs requires careful planning to make sure the legacy is passed on, but not a hefty tax burden.

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The first thing to consider in deciding when to transfer a partnership is if it has a negative capital basis. This means the partner has received more distributions than they've contributed. If the current owner of the partnership interest has a negative capital balance, that could cause tax consequences for the heirs.

It is usually preferable to hold onto the partnership interest until death. This allows the heirs to potentially sell it tax-free with a “stepped-up” value. The stepped-up basis rule allows heirs to inherit the asset at its current market value, not the original cost basis of the partnership. This can slash future capital gains taxes if the heir decides to sell.

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Transferring a business partnership to heirs isn’t just a financial decision – it is also part of your legacy. Being thoughtful about strategic estate planning can help ensure that your legacy continues without undue tax burdens.

To learn more about tax liabilities when transferring a partnership, please contact Richard Kollauf, a Principal at SVA Certified Public Accountants.

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Eric is a Principal with SVA Certified Public Accountants with vast experience and technical knowledge in tax compliance, research, and planning. He assists corporations and partnerships with tax savings through transaction structuring, tax credits and accounting methodology. He works closely with businesses to plan their cash flow for tax liabilities through quarterly estimate planning.

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