Does a partnership end when a partner dies?

A two-person partnership continues while the estate shares in results

Official guidance describes that successor as usually the estate.

The estate is the successor in interest in the usual case.

The deceased partner's final tax year closes

The decedent's distributive share before death is reported on the final return.

The entity itself and the tax year of the deceased partner are separate points. A partnership can continue under the estate's share while the final return for the deceased partner reflects only the period before death.

A specific bequest of the interest to an heir

Practitioners also note that a specific bequest and a pecuniary bequest can differ in whether the estate or the beneficiary reports partnership income in later years.

The type of bequest bears on who reports the income that follows.

Buy-sell and liquidation terms in the partnership agreement

A buy-sell agreement is an agreement among owners of a closely held business that restricts owners' rights to transfer their interests and usually gives other owners and the entity rights to purchase.

Practitioners describe these agreements as addressing orderly transfer at death, business valuation for transfer and tax purposes, and succession when an owner is disabled.

A buy-sell price set below fair market value may leave a decedent's successor with less cash than the estate tax assessed on the partnership interest, according to commentary.

Partnership agreements can include language stating that the deceased partner's interest is retired through liquidating payments. The partnership books eliminate the deceased partner's capital interest and record a payable to the successor.