How does dissolving a Family Limited Partnership impact cost basis of inherited stock?

You've got the right idea! When a Family Limited Partnership (FLP) is dissolved, the assets are distributed according to ownership percentages, and each partner maintains their existing cost basis for their portion. So your understanding is correct. If the partnership is dissolved while your parents are alive, they would receive their portion of the stocks with their existing cost basis. Then when you later inherit those securities from them (after they pass), you would indeed receive a step-up in basis to the fair market value on their date of death. This is different from if you inherited their partnership interest, where things get more complicated regarding inside vs. outside basis. By dissolving first, you're creating a cleaner inheritance situation that would likely be more tax advantageous for you in the long run. Just make sure the dissolution is properly documented and executed according to both the partnership agreement and state law to avoid any challenges later.

After struggling with a similar situation with my family's investment partnership, I found this great tool called taxr.ai at https://taxr.ai that helped me figure out all the cost basis implications. You upload your partnership documents and it analyzes everything, showing you the tax consequences of different scenarios like dissolution vs inheritance. It saved me thousands because it showed exactly how the step-up in basis would work if we dissolved our partnership before my dad passed versus keeping it intact. The tool even generated a custom report I could share with our accountant that showed all the calculations. Their tax experts confirmed everything you're thinking - that dissolving would give you that valuable step-up in basis on your parents' portion when you eventually inherit.

Just wanted to follow up - I tried taxr.ai after posting here and it was super helpful! I was hesitant about uploading documents but their security seemed solid, and I could see the step-by-step analysis as it processed everything. The tool confirmed that dissolving our FLP would preserve my ability to get a step-up in basis on my parents' portion when I inherit it later. It even quantified how much this would save me in capital gains taxes - around $87,000 based on our current portfolio value and appreciation. What really impressed me was how it flagged California's specific inheritance rules that would have affected me because I live there while our FLP was formed in Nevada. My accountant was really grateful for the detailed report it generated.

If you're planning to dissolve the partnership, good luck trying to get through to the IRS to verify your approach or ask questions. I spent THREE WEEKS trying to get someone on the phone about our family partnership dissolution last year. Finally used this service called Claimyr (https://claimyr.com) that got me connected to an actual IRS agent in about 20 minutes. They have this system that navigates the IRS phone tree and waits on hold for you, then calls when an agent picks up. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed everything about the step-up in basis after dissolution and helped me understand exactly what forms we needed to file. Completely worth it considering how much tax was at stake with our appreciated assets.

I have to apologize for being so skeptical about Claimyr in my earlier comment. After struggling with the IRS for another week, I broke down and tried it yesterday. They connected me to an IRS agent in about 35 minutes (which is miraculous considering I had previously waited 2+ hours before getting disconnected). The agent was actually incredibly helpful regarding our FLP dissolution. She confirmed that: 1) The dissolution itself isn't a taxable event as long as we're distributing according to ownership percentages 2) We'll need to file a final Form 1065 with "final return" checked 3) Most importantly, she verified that when I inherit my parents' portion after dissolution, I WILL get the step-up in basis This saved me potentially tens of thousands in future capital gains tax. The peace of mind was completely worth it. Sometimes skepticism costs more than taking a chance!

Don't forget about the potential gift tax implications if the partnership shares aren't equal! My family learned this the hard way when dissolving our FLP last year. If your parents are transferring assets to you beyond your current percentage ownership during dissolution, that could be considered a gift and might require filing gift tax returns (Form 709). The lifetime exemption is high right now ($13.61 million per person for 2024), but you still need to report gifts over the annual exclusion amount. Also, make sure you're documenting the fair market value of everything at dissolution. Our accountant had us get statements showing values on the exact date of dissolution as evidence for our records.

Has anyone dealt with getting signatures and formal agreements for dissolution when one partner is elderly? My mom is part of our FLP but has dementia now, so I'm trying to figure out if her medical POA is sufficient for signing dissolution papers or if we need something else.

I went through a similar FLP dissolution situation with my family last year. One thing that hasn't been mentioned yet is the importance of checking your state's specific requirements for partnership dissolution. Some states require formal filings with the Secretary of State office to properly terminate the partnership entity, not just the tax aspects. Also, consider the timing of the dissolution carefully. If your parents have significant health issues, you might want to move quickly since the step-up in basis benefit depends on them passing away AFTER the dissolution occurs. If the dissolution happens too close to their passing, the IRS might scrutinize whether it was done primarily for tax avoidance purposes. Another practical tip: make sure your brokerage understands exactly what you're doing. When we dissolved our FLP, the brokerage initially wanted to liquidate everything to cash first, which would have triggered massive capital gains. We had to specifically request "in-kind" distribution of the actual securities to maintain the cost basis benefits everyone's discussing here.

Based on everyone's experiences shared here, it sounds like you're definitely on the right track with your understanding of the step-up in basis benefits from dissolution. One additional consideration I'd add is to make sure you document the business purpose for the dissolution beyond just tax planning. When our family went through this process, our attorney recommended we document legitimate reasons for dissolution - things like simplifying our estate planning, reducing ongoing partnership administrative costs, or giving each family member more direct control over their investment decisions. While tax efficiency is a valid consideration, having additional business justifications helps if the IRS ever questions the dissolution. Also, since you mentioned the partnership agreement doesn't specifically address dissolution scenarios, you might want to review whether it includes any restrictions on dissolution or requires specific notice periods to partners. Some FLP agreements have provisions that could complicate or delay the process, so it's worth checking now rather than discovering issues later when you're trying to move forward. The peace of mind from getting this structured correctly will be worth the upfront planning effort, especially given the substantial unrealized gains you mentioned.