A Family Limited Partnership (FLP) and a Limited Liability Company (LLC) can be a form of ownership among members of a family. The main advantages of such entities are estate and gift tax savings and asset protection. An FLP or LLC also allows you to retain control over the transferred assets while enjoying these advantages.
An FLP or LLC is a special legal vehicle that can preserve family assets or a family business for future generations while helping to shelter assets and reduce overall gift and estate taxes. FLPs and LLCs are commonly used as part of business succession planning, business continuity plans, and often serve as an integral component of an estate plan for high net worth individuals. Limited partners of an FLP or members of an LLC may receive distributions from the entity.
Once the FLP or LLC is established and assets are transferred to it, you can make gifts of FLP interests or LLC interests to your children or other beneficiaries. This accomplishes several different estate planning objectives simultaneously.
First, the value of each FLP or LLC interest which you give away decreases the value of your taxable estate and, consequently, the taxes which your heirs would have to pay upon your death. The gifts can be made using the annual gift tax exclusion, so you do not have to pay any gift tax on the transfer, and they are also made by sales in tax advantaged ways.
Second, for tax purposes the value of the FLP or LLC interests transferred to your beneficiaries may be far less than the corresponding value of the assets in the FLP or LLC. Since limited partners of an FLP or members of an LLC do not have the ability to direct or control the day-to-day operation of the entity, a minority discount may be applied to reduce the value of the interests which you are gifting. Furthermore, because the FLP or LLC is a closely-held entity and not publicly-traded, a discount may be applied based upon the lack of marketability of the interest. This allows you to leverage the FLP or LLC as a vehicle to transfer more wealth to your beneficiaries, while retaining control of the underlying assets. Lastly, a properly-structured FLP or LLC can have creditor protection characteristics since the general partners of an FLP or managers of an LLC are not obligated to distribute earnings of the entity.
The interests in a FLP or LLC can be easily divided among family members, who may each own different amounts and have different voting rights. The FLP or LLC enables ownership of a business to transfer to the younger generation, while allowing the senior generation to continue conducting operations and mentoring and grooming the young owners.
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Family Limited Partnerships & LLCs
A Family Limited Partnership (FLP) and a Limited Liability Company (LLC) can be a form of ownership among members of a family. The main advantages of such entities are estate and gift tax savings and asset protection. An FLP or LLC also allows you to retain control over the transferred assets while enjoying these advantages. Read More
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