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 the 2 and 20 arrangement). Funds are typically organized as limited partnerships, with the carried interest allocated to the general partner (GP) entity. It is the manager’s ownership of a portion of the GP that entitles the manager to a share of the carried interest.

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