Tax Issues and Estate-Planning Obstacles Associated With Transferring Carried Interest in PE Funds (Part One of Three)

The entire PE industry is built around the constant pursuit by PE sponsors of carried interest, which is itself a moving target in terms of how much will be earned and when. These factors can create an issue when, for estate-planning purposes, private fund founders seek to transfer rights to carried interest to their descendants. The potential scope of these estate-planning issues, along with potential solutions for navigating them, were addressed in a recent webinar sponsored by Strafford CLE Webinars featuring Stroock partner Kevin Matz. This first article in a three-part series provides an overview of the relevant Internal Revenue Code (Code) provisions and potential tax risks associated with transferring rights to carried interest. The second article will detail some estate-planning solutions for structuring contributions of carried interest to comply with the Code or, where appropriate, to avoid its purview altogether. The third article will summarize valuation issues associated with gifting or selling carried interest, along with some contractual provisions to mitigate those concerns. See our four-part series “Taxation of Carried Interests for Senior Level Fund Managers”: Part One (Aug. 6, 2019); Part Two (Aug. 13, 2019); Part Three (Aug. 27, 2019); and Part Four (Sep. 3, 2019).

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