Note: Because the partnership interest must be included in the decedent's gross estate at fair market value (FMV), a buy/sell agreement that results in the sale of the partnership interest for less than FMV may cause the deceased partner's successor in interest (e.g., his or her estate) to receive an amount of cash that is less than the estate tax assessed on the transferred interest.
A two-person partnership does not terminate upon a partner's death if the deceased partner's successor in interest (usually the estate) continues to share in the partnership's profits or losses (Regs.
When the interest is retired, the partnership books should reflect the elimination of the deceased partner's interest in capital and the establishment of a payable to the partner's successor in interest. All subsequent payments made to retire the interest should reduce the payable.
Partnership tax returns should be filed as long as payments are being made to the deceased partner's successor in interest.
In addition, the successor in interest receives a step-up in at-risk basis equal to the amount of the step-up to FMV (if any) at the date of death (or alternate valuation date) under Sec.
