Private Equity Wealth Planning Guide

An honest framework for the decisions at hand. Not tax or investment advice — your specifics matter.

Carried interest taxation

• Pre-2017: carry = LTCG with 1-year holding period.
• TCJA 2017 added IRC § 1061: extended to 3-year holding period for LTCG treatment. Sub-3-year carry = short-term capital gain taxed at ordinary rates (+3.8% NIIT + state).¹
• The 3 years run from the partnership's acquisition of the underlying asset, NOT from fund inception.
• Early-exit deals (sub-3 year holds) turn carry into ordinary income — combined federal effective rate ~40.8% (37% + 3.8% NIIT) vs 23.8% (20% LTCG + 3.8% NIIT). On $5M of carry, the difference is $850K.
• Planning: carry structure (crystallization, waterfall design), holding-period management, S-corp/C-corp alternatives are active post-TCJA.

GP commitment funding

• GP commitment: partners contribute 1-5% of fund alongside LPs — creates 'skin in the game' alignment.
• Capital calls: irregular, 1-5 years, amounts unpredictable.
• Funding options: personal cash, margin against portfolio, firm credit facility, personal credit line.
• Firm credit facility often cheapest (1-3% over SOFR); margin expensive (5-8%); personal cash inefficient but simple.
• Planning around liquidity: maintain 2-3x next year's expected capital calls in readily-available credit.

QSBS on portfolio company stock

• Qualified Small Business Stock under IRC § 1202: original-issue C-corp stock, qualifying trade or business.²
• Post-OBBBA (stock issued after July 4, 2025): asset ceiling $75M (was $50M); exclusion cap greater of $15M or 10× basis (was $10M); tiered holding — 3yr=50%, 4yr=75%, 5yr=100% exclusion.³
• Pre-OBBBA stock: $50M ceiling, $10M cap, full 5-year hold required for any exclusion.
• Partners with direct portfolio-company stock (not held through the fund) may qualify individually.
• QSBS stacking: gifting stock to non-grantor trusts (each trust = separate taxpayer) multiplies the $15M cap. Each trust must hold its own holding period.
• Plan 5+ years pre-exit, not 5+ months. Interaction with carry: typically separate — carry is partnership-level, QSBS is direct-stock.

Deferred compensation

• PE firms often use deferred comp vehicles (NQDCs) for associates and principals.
• 409A rules: deferral elections must be made in advance; distributions locked to specific dates or events.
• Forfeiture risk: if firm encounters financial distress, deferred comp may not be protected.
• Planning: balance deferred comp (tax deferral) against concentration risk in firm.

Illiquid-wealth credit strategy

• Most PE partners have 50-80% of wealth in illiquid carry, GP commit, fund interests.
• Personal liquidity planning around this is distinct from regular HNW planning.
• Structured credit lines against portfolio (if any): typically available at 50-70% advance.
• Pledging personal brokerage for margin (if available): lowest-cost liquidity.
• Don't over-leverage: 2008 taught the cost of margin calls during market dislocations.

Tax residency and state planning

• PE partners often have flexibility — can they establish residency in no-tax states?
• CA and NY: aggressive audit + tax pursuits. Relocating requires clear domicile establishment (>183 days, driver's license, voter registration, etc.).
• Statutory residency rules: can trigger based on days-in-state alone.
• Florida, Texas, Nevada, Wyoming popular for PE partners. Multi-year transition planning.

Estate planning for illiquid wealth

• Valuation discounts: partnership interests can be discounted 20-35% for lack of marketability and lack of control when gifted (limited by IRC § 2704 post-2017 regulations).⁴
• Grantor Retained Annuity Trusts (GRATs under IRC § 2702): move future appreciation outside estate at minimal gift-tax cost. Works particularly well for pre-exit fund holdings expecting appreciation above § 7520 hurdle rate.
• Dynasty trusts in favorable states (SD, NV, DE, AK, WY) can compound generation-skipping-tax-exempt for 365+ years or in perpetuity.
• OBBBA update: federal estate/gift exemption permanently $15M/person from 2026 (prior sunset to ~$7M is gone).⁵ Gifting strategies remain valuable for moving future appreciation outside estate, though the 2024-2025 "use it or lose it" urgency has eased.

Sources

1. IRC § 1061 — Partnership Interests Held in Connection with Performance of Services (3-year holding period for carry).
2. IRC § 1202 — Partial Exclusion for Gain from Certain Small Business Stock.
3. Holland & Knight — OBBBA § 1202 Changes (July 4, 2025).
4. IRC § 2704 — Valuation of Certain Restrictions. Partnership-discount limitations.
5. IRS — 2026 Inflation Adjustments (OBBBA permanent $15M estate exemption).
6. IRC § 409A — Deferred Compensation Rules (NQDC).

PE wealth planning sits at the intersection of carried-interest taxation (IRC § 1061), QSBS (post-OBBBA), and estate planning. Verify specific fund documents with qualified counsel.