Planning with carried interest

The ownership of carried interest by managers of private equity funds, venture capital firms, and hedge funds presents unique wealth transfer opportunities. Carried interest provides the potential to leverage gifts to younger generations at a low gift tax cost—but also poses some complications that can present challenges if applicable rules aren’t navigated carefully.

A manager of an investment fund often has an economic interest in the fund known as a “carried interest.” This carried interest is commonly a 20% allocation of the fund’s profits or gains. Frequently, this is in addition to the 2% asset management fee earned by the fund’s management company (together with the carried interest, this creates the fee structure commonly referred to as “two and twenty” arrangement). Funds are typically organized as limited partnerships, with the carried interest allocated to the general partner (GP) entity.¹ It is the manager’s ownership of a portion of the GP that entitles the manager to a share of the carried interest. 

Please note: The complete publication, including important information and disclosures, can be downloaded via the link below.

¹Investment funds can also be structured as limited liability companies (LLCs). Because the income taxation and planning concepts are the same for LLCs (that, for federal tax purposes, are classified as partnerships) and limited partnerships, for the sake of simplicity, this whitepaper discusses only funds set up as limited partnerships.