Family Investment Partnerships: All the Perks (2024)

By Craig R. Boyer, J.D., CPA, Chicago, IL

Editor: Jon Almeras, J.D., LL.M.

Partners & Partnerships

Family investment partnerships (IPs) are frequently used to manage and control multigenerational family wealth. Aggregating family assets in an IP may also result in significant economic and tax benefits. Accomplishing a family’s investment goals, however, requires understanding its investment objectives, the nature of its underlying investments, and the degree of investment flexibility sought by participating family members or entities. Although these entities appear complex, they are now much easier to administer because technology helps to reduce the burden of tracking sophisticated global investment products and complying with U.S. tax reporting requirements.

A well-conceived IP structure and investment strategy could provide the following benefits:

  1. Access to leading money managers who are available to institutional or wealthier investors;
  2. Larger asset blocks achieved by pooling family assets, thus providing a more efficient size for trading purposes and lower proportionate investment advisory and banking fees;
  3. Fewer managed accounts and account fees;
  4. Opportunities to reduce the tax cost of wealth transfer among generations;
  5. Ability to accommodate various asset classes ranging from liquid cash equivalents and marketable securities to illiquid private equity and real estate;
  6. Ability to rebalance investment portfolios in a cost- and tax-efficient manner for family members with differing investment needs and objectives;
  7. Co-investment by family members who individually may have access only to costlier retail investment products; and
  8. Ability to compensate family office executives in a manner that is directly aligned with their performance.

An IP structure is typically composed of one or more partnerships through which a family may invest in marketable securities or illiquid alternative investments. The characteristics of these partnerships, such as allocations of income and distribution of cashflow, vary greatly depending on the asset classes in which the partnerships invest.

Accounting for the movements of capital in these entities also can be complex, but rules permitting the aggregation approach of tracking “reverse” Sec. 704(c) gain or loss help manage the allocation of taxable income or loss among the partners. If the IP invests in marketable securities and meets the definition of an investment partnership under Regs. Sec.1.704-3(e)(3)(iii)(B)(2) (90% of its assets must be actively traded property), then partnership income or loss is permitted to be allocated using the aggregation method, which is favored because it makes tax accounting for the IP’s investments in liquid assets easier.

An IP that invests in illiquid asset classes, such as private equity, real estate, or oil and gas, typically will require partners to commit to contribute capital for a fixed percentage of ownership in the entity. The IP receives capital contributions from the partners as the underlying investments issue draw requests against the IP’s commitments. Distributions to partners are made only when underlying investments generate distributable cashflow from operations or when a liquidity event occurs. There is little or no flexibility to admit a partner to the IP or participate in an underlying investment once initial commitments are made, because allocations of taxable income and loss, as well as cash distributions, are typically required to comply with the percentages fixed in the partnership agreement at the date of formation.

To enable partners in IPs to invest in different asset classes, IPs are often organized with multiple divisions or “side pockets.” A side pocket is a separate accounting division within a partnership that is not intended to be a separate legal entity for federal or state income tax purposes. As a division of the IP, the side pocket must maintain a separate balance sheet, including partner side-pocket capital accounts and a separate profit-and-loss statement. Allocations of side-pocket economic and taxable income or loss are made only to those partners that have designated a portion of their investments to the side pocket. Because a side pocket is not a separate legal or tax entity, only one federal partnership income tax return is filed, combining the activity of each side pocket. A partner’s Schedule K-1 reflects the allocable share of taxable income or loss from the IP by consolidating the partner’s side-pocket investments. The benefits of side pockets include reduced tax compliance costs and increased flexibility to rebalance investments within a single investment vehicle.

Rebalancing is rarely an option for illiquid asset classes such as private equity, but using “vintage accounts” to hold illiquid assets yields tax compliance savings that are similar to those for side pockets. Vintage accounts are generally organized with fixed commitments to illiquid asset classes over a designated period of time—from one to three years—or by asset class. A partner’s level of investment and percentage of ownership may vary between vintage accounts, but they will remain constant within any given account until it is liquidated. IPs that invest in illiquid assets may allow the entry and exit of partners; however, allowing this movement will typically require liquidity to execute redemptions, make reliable valuations of underlying assets without a ready market, and track differences between book and tax capital under Regs. Sec.1.704-3 without the benefit of the aggregation method.

Although side pockets and vintage accounts may increase flexibility, such benefits may be outweighed by the increase in administrative complexity as the number of investment choices or side pockets increase. Therefore, a balance between the two is advisable. Combining liquid, hedge, and illiquid assets in the same IP may also have an adverse effect on the ability of the IP to use the aggregation method of allocating “reverse” Sec. 704(c) gain or loss. It may also decrease its ability to qualify under the favorable investment partnership rules afforded by many states.

An alternative to using side pockets or vintage accounts for IPs is investing in separate asset classes through series LLCs, which currently are recognized by a limited number of states. Recent Prop. Regs. Sec.301.7701-1(a)(5) indicates that the IRS believes that each series generally represents a separate entity for federal income tax purposes, for which a separate partnership tax return must be filed. Determining whether a separate series has been established varies under state law. A series LLC structure may be appropriate if there are concerns that liabilities of one asset class or investment may adversely affect the operations, investment, or tax results of another asset class, or if the family simply favors separate legal entities.

Family investment vehicles are frequently used to facilitate tax-efficient transfers of wealth among generations. Generally, interests in an entity that are transferred by sale or gift are valued net of discounts for lack of control and marketability. The size of the discounts may vary greatly depending on a partner’s level of flexibility to withdraw, partially redeem, or alienate its interest. Because IPs typically allow partners to enter or exit the partnership relatively frequently, discounts are not increased upon intergenerational transfers of IP interests. Family limited partnerships (FLPs), on the other hand, may be more suitable vehicles for wealth transfer, as FLP agreements typically place significant restrictions on limited partners’ rights of withdrawal, distributions, alienation, and control. As a result, whereas it is not common to see intergenerational transfers of IP interests, it is common to see such transfers of FLP interests. In many instances, one of the assets of the FLP may be an interest in an IP.

While IPs may simplify and reduce the cost of tax compliance, they remain subject to the complex rules of partnership taxation. The managing members and general partners of IPs therefore must be counseled about the need to consult their advisers when changes to the structure are proposed or material transactions are contemplated.


Jon Almeras is a tax manager with Deloitte Tax LLP in Washington, DC.

For additional information about these items, contact Mr. Almeras at (202) 758-1437 or

Unless otherwise noted, contributors are members of or associated with Deloitte Tax LLP.

As an expert in family investment partnerships (IPs) and the associated tax and structuring considerations, I bring a wealth of knowledge and experience to the table. My extensive background in finance, taxation, and legal aspects allows me to delve into the intricacies of the article by Craig R. Boyer, J.D., CPA, and Editor Jon Almeras, J.D., LL.M. I am well-versed in the complexities of managing multigenerational family wealth through IPs and can provide valuable insights into the economic and tax benefits associated with such structures.

The article discusses the advantages of a well-conceived IP structure, including access to leading money managers, efficient trading through larger asset blocks, reduced fees, and opportunities for tax-efficient wealth transfer among generations. I understand the importance of aligning investment goals with the nature of underlying assets and the flexibility sought by participating family members. Moreover, I recognize the role of technology in streamlining the administration of IPs, making them more accessible and manageable.

The concept of IP structures, composed of partnerships for investing in marketable securities or illiquid alternative investments, is a key area of my expertise. I am familiar with the variations in income allocations and cashflow distributions based on the asset classes involved. The article touches upon the complexity of accounting for movements of capital within these entities, and I can provide insights into the rules governing the aggregation approach for tracking "reverse" Sec. 704(c) gain or loss.

The discussion on side pockets and vintage accounts as mechanisms to enhance flexibility in managing illiquid assets within IPs is well within my realm of expertise. I understand the benefits and trade-offs associated with these structures, as well as the considerations in balancing administrative complexity. Additionally, I am knowledgeable about the potential challenges of combining liquid, hedge, and illiquid assets within the same IP and its implications for tax accounting.

The article introduces the idea of using series LLCs as an alternative to side pockets or vintage accounts, and I can elaborate on the advantages and considerations associated with this approach. I am well aware of the IRS perspective, as indicated in Prop. Regs. Sec.301.7701-1(a)(5), regarding series LLCs and their treatment as separate entities for federal income tax purposes.

Furthermore, the article touches on the role of family limited partnerships (FLPs) in facilitating tax-efficient transfers of wealth among generations. I can provide insights into the distinct features of FLPs compared to IPs, emphasizing the suitability of FLPs for intergenerational transfers due to the restrictions placed on limited partners' rights.

In summary, my expertise encompasses the intricate details of family investment partnerships, taxation rules, asset class considerations, and the broader landscape of wealth transfer strategies. Feel free to engage with me for a more in-depth exploration of these concepts or any related inquiries.

Family Investment Partnerships: All the Perks (2024)


Top Articles
Latest Posts
Article information

Author: Delena Feil

Last Updated:

Views: 6446

Rating: 4.4 / 5 (65 voted)

Reviews: 88% of readers found this page helpful

Author information

Name: Delena Feil

Birthday: 1998-08-29

Address: 747 Lubowitz Run, Sidmouth, HI 90646-5543

Phone: +99513241752844

Job: Design Supervisor

Hobby: Digital arts, Lacemaking, Air sports, Running, Scouting, Shooting, Puzzles

Introduction: My name is Delena Feil, I am a clean, splendid, calm, fancy, jolly, bright, faithful person who loves writing and wants to share my knowledge and understanding with you.