Preservation | Family Wealth Protection & Planning

A commonly used planning technique is the creation of a closely held business to own family investments, such as a family limited partnership or family limited liability company.

Many individuals use the family limited partnership structure because it provides continuity of ownership, consolidates management, and proactively implements succession planning. The family limited partnership allows an individual to transfer marketable securities and other property to their family and yet retain a level of central management authority. The individual may choose to gift limited partnership units to family outright, or to trusts for those beneficiaries. A primary benefit of a family limited partnership is that the entity’s assets are not owned by the individual limited partners but by the entity, thereby protecting the partner’s individual assets from the claims arising from ownership of the entity.

Minority or non-voting interests in a closely held business entity, such as a family limited partnership, are ideal assets to gift. This is because under current law, the value of such interests may be discounted for such things as lack of marketability or lack of control, when determining the value for gift tax purposes. The value assigned to such interests for gift tax purposes is “fair market value,” or the value at which a willing seller will sell, and a willing buyer will buy, the property being transferred. Since an interest in a limited partnership is generally difficult to sell in the market to any non-related party, and since an owner of such an interest has no control rights with respect to the entity, the interest has a fair market value less than its pro-rata share of the entity’s underlying assets.

One caution when using a family limited partnership structure is that recently the IRS has been scrutinizing such arrangements, especially if the individual who created the entity retains ownership interests at death. Thus, in many instances it may be advisable to either gift the ownership interests or sell them, so that the interests are not retained at the time of death. In any event, it is important that the individual properly create and administer the family limited partnership and respect the partnership as a separate and distinct legal entity, and not merely an extension of the owners.

The discounts that may already be applied to minority or non-voting interests in a closely held business entity, coupled with asset values that are already depressed, make now a prime opportunity to consider utilizing such a family limited partnership planning strategy. Transferring such interests ultimately means that a greater amount of assets can be transferred without using as much of an individual’s lifetime gift/estate tax exemption amount.

While only a family limited partnership is discussed here, the concepts discussed generally apply the same to both a family limited partnership and a family limited liability company.

Please contact an attorney in our Trusts & Estates Practice Group if you have questions related to family limited partnerships or family limited liability companies.

Stay tuned for Part 6 of this series, where we will discuss installment sales to defective grantor trusts.

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