By Nestor Cruz, Of Counsel, Dunlap, Bennett & Ludwig
Limited liability companies possess several attributes which make them attractive to owners of active businesses, or of real property held for speculation and future development. LLCs provide the limited liability of corporations, yet are taxed as partnerships, that is, there is only one level of taxation, unlike C corporations. S corporations share the same advantage but are subject to certain restrictions which make them less flexible than LLCs. For example, nonresident aliens and most types of trusts are not eligible shareholders. Unlike general partners, no member of an LLC is personally liable for the entity’s obligations. Thus, LLCs protect all of its members’ assets from environmental, tort, and other large potential liabilities.
Family owned LLCs are also useful in estate planning because of the potential for marketability discounts. These discounts can be as high as 35% of the business valued as a going concern. Obviously, discounts of this magnitude can shrink gift and estate taxes considerably.
Predictably, the Internal Revenue Service looks with great disfavor upon marketability discounts for family LLCs, especially where the LLC merely holds readily marketable liquid assets, such as listed stocks and bonds. Similarly, gifts to family members in a deathbed family LLC, which by definition has no history of conducting a business, will be challenged. In both cases, the sole purpose of the LLC is to create discounts which would not otherwise exist.
On the other hand, an LLC owning and leasing real property will satisfy the business purpose requirement. Similarly, an LLC formed to hold real property which is likely to appreciate in value and which the owners intend to develop or sell at the right time should pass the business purpose test. Moreover, an LLC holding a large and valuable parcel of real property offers a practical advantage when transferring interests to younger generations, since such an LLC avoids the inconvenience of transferring multiple deeds to individual portions of the property.
Unfortunately, when attempting an estate freeze through an LLC, the members must comply with the complex and exacting provisions in Sections 2701 through 2704 of the Internal Revenue Code. Nevertheless, with proper planning, an LLC can result in substantial income, gift, and estate tax savings, while providing an entity convenient for operating a business, managing its succession to future generations of members, and protecting assets. If you have any questions on family LLCs, please contact the legal experts at Dunlap Bennett & Ludwig.
Posted in: Estate Planning