Also in this Issue:
-Limited Liability Companies:
An Introduction and General Overview
-Real Estate Investment Using LLCs:
Not Always a No-Brainer
-LLCs: Assessing the Tax Pros and
Cons
ESTATE PLANNING WITH FAMILY PARTNERSHIPS AND LLCs
by Tom Stikker stikker@ddrs.com
Minimize Taxes. Of particular concern to many of our clients is minimizing estate and gift taxes on the transfer of their wealth during their lifetime or at death to their children or other beneficiaries. The amount of these taxes (the gift tax applies to lifetime transfers and the estate tax applies when assets are passed on at death) is based on the fair market value of the assets transferred at the time of the gift or at death. Because gift and estate taxes are based on fair market valuation of assets (with tax rates that can range up to 55%), proper estate planning often involves consideration of techniques which can result in lower asset valuations for tax purposes.
In this regard, family limited partnerships and limited liability companies (LLCs) have become popular vehicles not only for business reasons, but also because of the tax advantages they can offer in the estate and gift tax arena. These entities, when properly employed, can result in substantial tax valuation discounts for assets transferred to family members.
Valuation. Family assets can be transferred to the partnership or LLC and then gifts of interests in the new entity can be made, either during lifetime or at death. The value of the gifted interests in the entity, however, is not based solely on the value of the entity's individual assets. Instead, the value of the interest in the entity transferred often can be discounted to reflect restrictions included in the structure of the entity, the lack of a market for an interest in a family entity, and the fact that a gifted interest may reflect a minority interest without any control over the entity. In the proper situation, this type of planning may result in discounts for gift or estate tax purposes of 20-40% of the value of assets transferred to children or other beneficiaries.
Such substantial discounts can enable clients to give more of their assets away tax-free during lifetime by leveraging their annual gift tax exclusion ($10,000 per person per year) and the unified credit exempt amount that can be passed on to children or other beneficiaries ($625,000 this year, increasing gradually to $1,000,000 in 2006). It also can substantially reduce the amount of gift or estate tax due on taxable transfers.
Avoid Disputes with the IRS. Not surprisingly, the Internal Revenue Service is becoming increasingly aggressive in attacking this type of planning. To avoid a dispute with the IRS over the estate or gift tax valuation of transfers of interests in such entities, we recommend that clients have business or real estate interests to transfer to the entity and a legitimate business purpose (other than valuation discounts) to the plan.
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