A family limited partnership or a limited liability company can provide important tax and non-tax benefits. From a non-tax standpoint, these entities are important in that they can provide a vehicle for managing family assets and can protect you from liabilities arising in connection with the assets held in the FLP or LLC. It can also provide asset protection, in that a creditor who might successfully seize the partnership interest from you will succeed only to your distribution rights, and may not be able to force a liquidation of the partnership (making it a much less attractive asset to seize.) Thus, a FLP or LLC is an excellent way to own buildings or an unincorporated business. From an income tax standpoint, a FLP or LLC can be superior to a corporation because there are no federal income taxes, and minimal or no state income taxes, on the income.
From a gift and estate tax planning standpoint, a FLP or LLC can give rise to significant valuation discounts. If a person owns a percentage interest in a FLP or LLC, the value of that interest will be less than the same percentage of the value of the net assets of the partnership. For example, assume that a FLP owns assets worth $100,000, and you own 10% of the partnership. Generally, your interest would be worth less than the $10,000 you’d receive if the partnership terminated and distributed the assets to the partners. That’s because you probably can’t force the partnership to terminate and distribute the assets. Rather, you’re entitled only to whatever distributions the general partner of the FLP or manager of the LLC elects to make. Typically, discounts from “liquidation value” will range from 15% to 40%, depending on the facts of the case.
If you make gifts of interests in a FLP or LLC, the value of the gift is based on the rights that the recipient has in the interest. Thus, the more power you retain in the partnership (and the less power the recipient has over the partnership), the smaller the value will be for the gift. On the other hand, on your death, the value of the asset in your estate will be based on the rights you’ve retained. Thus, the more power you retain in the partnership (and the less power the recipients of gifts you’ve made have received), the greater the value will be in your estate.
For more information regarding estate planning, business law or tax controversy and compliance, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com or call us at 404-255-7400.
In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.