Estate Planning With Family Partnerships

For estate planning purposes, a family partnership is typically a limited liability company or a limited partnership. A limited liability company (“LLC”) is an entity that combines the limited liability of a corporation with the “pass-through” taxation of a partnership. A family limited liability company (“FLLC”) is a standard LLC which is owned exclusively by family members. The typical FLLC is formed with two classes of ownership interests (voting and non-voting), and is managed by a “manager” who is selected by the owners (or “members”). A family limited partnership (“FLP”) is very similar to an FLLC. Although, an FLLC offers more protection than an FLP since no general partner (with unlimited Cialis liability) is required.

Example

Parents transfer $2 million of commercial real estate to an FLLC in exchange for a 1% voting interest and a 99% non-voting interest. With the voting interest they appoint themselves as the managers of the FLLC. Soon afterward, they gift the non-voting interests to their children, grandchildren and/or to trusts for the benefit of their children and grandchildren (the “donees”). These gifts will be gift tax-free to the extent of the parents’ $13,000 ($26,000 for a married couple) annual gift tax exclusion and $1,000,000 ($2,000,000 for a married couple) lifetime gift tax exemption.

There is no gain or loss to the parents upon the contribution of the real estate to the FLLC. The parents, as managers, will continue to manage the real estate and can even receive a reasonable management fee for their services. Each member will owe income taxes on his/her/its proportionate share of the FLLC’s income.

Tax Advantages

– The future income and appreciation on the nonvoting membership interests gifted are removed from the parents’ gross estates, even though the parents continue to manage the FLLC. While there is a present lapse in the estate and generation-skipping transfer taxes, it’s likely that Congress will reinstate both taxes (perhaps even retroactively) some time during 2010. If not, on January 1, 2011, the estate tax exemption (which was $3.5 million in 2009) becomes $1 million, and the top estate tax rate (which was 45% in 2009) becomes 55%.

– To the extent the donees are in lower income tax brackets than the parents, income tax savings are achieved.

– If the gifts of the non-voting membership interests are made to a so-called “grantor trust” established by one of the parents, the grantor-parent will be taxed on the trust’s income. The grantor’s payment of the trust’s income taxes is the equivalent of a tax-free gift to the beneficiaries of the trust.

– Because

Following, is a checklist of ways to minimize an IRS attack under IRC Section 2036:

1. Include some operating business or real estate investment in the FLLC. Do not transfer personal use assets to the entity.

2. Create the FLLC well before death, and adhere to the terms of the operating agreement.

3. Do not transfer all of the donor’s assets to the FLLC; and make sure the donor has sufficient liquidity apart from the FLLC.

4. Distribute profits unless needed for business purposes; and always make distributions pro rata.

5. Avoid making distributions, before and after death, to meet the personal obligations of the donor or the liabilities Tadalis SX of the donor’s estate.

6. Document the business purpose in the operating agreement.

7. Keep valuation discounts within amounts that are less likely to draw audit suspicion.

8. Have junior generational members contribute capital to the FLLC, instead of relying exclusively on gifts of membership interests.

9. Have annual partnership meetings to update events; and actively manage the FLLC’s assets.

10. Finally, by operating the FLLC as though the members were non-family members, the likelihood of challenging an IRS attack should be much greater.

Conclusion:

In order to achieve the desired tax results, the FLLC must have a valid business purpose. Whether a valid business purpose exists (other than to secure tax benefits) is a facts and circumstances test requiring the input of estate planning specialists. In any event, the FLLC is an important technique that should be considered as part of any estate plan, asset protection plan, or business succession plan.

THIS ARTICLE MAY NOT BE USED FOR PENALTY PROTECTION.

Author Bio: Julius Giarmarco, J.D., LL.M, chairs the Trusts and Estates Practice Group of Giarmarco, Mullins & Horton, P.C., in Troy, Michigan. For more articles on estate and business succession planning, please visit the author’s website, http://www.disinherit-irs.com, and click on “Advisor Resources”.

Category: Legal
Keywords: estate planning,family limited partnership,limited liability company,asset protection

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