Death of a partner

Forum|Forum|3 years ago
February 2, 2023
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I have an LP with 10 limited partners. Two of them (my parents) both passed away in 2021. When completing my 1065 in 2021, I indicated they both passed and it would be their final k-1. Now in 2022, they dropped off the partner list (as expected). However the beginning Capital amount does not match the 2021 Ending Capital because my parent's capital "disappeared"? Is that ok? Or should I override the beginning 2022 with the ending 2021? Or should I add their ending 2021 Capital into my Capital account in 2022? No money changed hands upon their death - I received everything from their estate.

TurboTax Business Windows

Mike9241

sorry for your loss but something should have been done with their ending capital accounts. don't know what the partnership agreement says about death of a partner. that's the first place to look. but I wouldn't be surprised if there was no such agreement. with no agreement, if they died intestate (no will) the state's laws would dictate what happens to their interest. If they had a will that would dictate. if held in their "living" trusts that would dictate. you may need to see a lawyer because that 2021 return may be incorrect. they can review the documentation and indicate how to proceed.

in short, someone(s) inherits their interest. certain adjustments made need to have been made.

gleightAuthor

Thanks for the response. A few clarifications: The partnership agreement allows limited partners to gift/bequeath their interest to their descendants or other partners; and I was the executor and sole heir to my parent's estate. The other partners and myself all were in agreement that I would "inherit" my parent's interest in the partnership.

Given all that, I still don't know the answer to my original question -- what do I do with their Capital balance at the end of 2021 that did not transfer to 2022? I appreciate any insight.

Rick19744

Employee

You have three issues to address:

The capital account matter is straight forward. You just "transfer" your parents capital to your K-1.
- This is just an internal "bookkeeping" matter
- On your parents final K-1 you would show a decrease on the respective K-1 in Section L other increase (decrease) line; a decrease.
- On your K-1 you would show this same amount on your K-1 same line; an increase.
- This should keep your balance sheet in balance.
The bigger issue (2nd issue) is updating your tax basis (outside basis).
- Because you inherited this interest from your parents, you need to adjust your tax basis for the FMV of the interest that you inherited.
- Since you will need to support this adjustment, this means that you technically need to value the partnership.
Since the taxpayer has the burden of proof, it's best to have this done ASAP.
You may want to contact a tax professional who can give you some recommendations on who can handle this valuation matter for you.
The third issue is determining the timing of this transaction.
- This will require an understanding of the "inheritance" process.
- What legal documents were drafted
- What do these documents say; when and how property is disbursed
- Does the estate get a k-1 until the partnership interest is transferred
- All this means potentially a few short period K-1's