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Revisited. We have talked about Family Limited Partnerships and Limited Liability Companies in past
newsletters. The FLP or LLC has been the subject of a multitude of cases, mostly having to do with the
valuation of FLP interests in a taxable estate. The most flagrant cases that reach the courts involve elderly
individuals transferring marketable securities to an FLP or LLC shortly before death. The estate claims
significant discounts for the underlying value of the assets, while the IRS uses various sections of the Internal
Revenue Code to try to assess taxes based on the total value of the underlying LLC or FLP assets.
There are a lot of business reasons for using an FLP or Family LLC for both liquid and business assets.
Centralized management and limiting liability are only a couple of the good non-tax reasons that make this a
viable strategy for most wealthy, and many not-so- wealthy, clients.
The purpose of this newsletter is not to go into all of the cautions about the formalities of organization, asset
transfer and administration of these entities. Rather, the object is to bring to the attention of you professional
advisors, the other strong estate planning and tax reasons for investigating and implementing the Family LLC
or FLP strategy. We want to explore lifetime gifts of LLC interests (or interests in FLP’s).
Why Lifetime Gifts? With the new administration and a Republican controlled Congress, a logical question at
this time is why worry about lifetime gifts if the estate tax is going to be repealed. However, lifetime gifts, to
transfer wealth to later generations, usually make a lot of estate planning sense. Gifting appeals to many
clients because of the natural inclination to want to transfer wealth, usually to family members. We can’t take
it with us even though many of us would like to.
Gift Tax Exemptions. The current gift tax exemption is $1.0 million per person. Even if the estate tax is
repealed, there is no mention of changing the gift tax or the gift tax exemption. Why is this? The reason,
apparently, is the concern of the IRS about shifting income tax burdens by transferring productive assets to
other family members in lower tax brackets. Transferring assets for income tax reasons can make good
sense from both an estate planning and tax planning standpoint. Interests in an LLC or partnership make
ideal assets to transfer.
The donee may or may not receive any cash distributions from the entity. Usually the donor retains at least
defacto control over the LLC or FLP and can limit the cash distributions. Not only that, the asset is not
saleable, so the donee will not be able to change his or her lifestyle by spending cash or selling marketable
securities..
Management Participation. Very often there are family businesses, real estate or security portfolios in which
the senior generation desires management involvement by children or grandchildren. The senior generation
can ascertain which individuals have management capability, if any, and make decisions regarding the
assets or properties accordingly. Children or grandchildren can have an ownership interest, without having
control, and their talents and aptitudes can be assessed.
Annual Exclusion. In addition to the lifetime exemption of $1.0 million per person, each individual has gift tax
annual exclusions of $11,000 per donee per year. With split gifting, a married couple increases this limit to
$22,000. In some cases, the spouse of the donee is included, bringing the total to $44,000 per year. These
can be impressive numbers over a period of years, depending of course on the number of descendants (and
possibly spouses).
The IRS recently challenged the annual exclusion classification of these gifts in the Hackl case, which we
have mentioned before. The disqualification for the annual gifts in Hackl of LLC interests can be avoided
using a Crummey-type power, in our opinion.
Lifetime Exemption. As we have pointed out, transfer of wealth to later generations is a natural part of estate
planning, all tax considerations aside. If the estate tax is going to be repealed, why not just die with all of your
assets? First, repeal is not yet a certainty. Second, and equally important, is the fact that if the estate tax is
repealed today, it does not mean that some kind of death tax will not be reinstated tomorrow.
Utilizing the lifetime exemption is truly consistent with normal human inclinations. It is a case of the bird-in-
the-hand versus two or more in that elusive bush.
Appreciation. In addition to the annual exclusion and lifetime exemptions, the transfer of asset appreciation
out of the gross estate of the senior generation is another reason for seizing the day and making lifetime
transfers. If there is business or property that is likely to be sold in the future, or if the asset or property is likely
to appreciate substantially for any number of reasons, it is all the more logical to explore using the lifetime gift
tax exemption.
State death taxes. There is also the unspoken and uncertain matter of state death taxes. Some states have
either enacted or are considering enactment of an inheritance tax or estate tax to replace the revenue that has
been lost by federal estate tax revisions. Yes, it may always be possible for a wealthy individual to change a
state of residence from a death tax state to a non-death-tax state. The next few years will see many states
jockeying for position in this regard. This is true especially since many of the popular sun-belt destination
states will be losing the most revenue from the federal amendments. In other words, the states that may be
attractive from a death tax standpoint may not be states in which most people want to live.
Conclusion. The bottom line is that lifetime transfers are and should be part of every estate plan. Utilizing the
annual gift tax exclusion, either directly or by leveraging through various devices such as charitable trusts,
QPRT’s or GRAT’s, should not be brushed aside.
If you have clients for whom gifting strategies, coordinated with overall estate planning, may be important
please contact Jim Modrall at 231-941-9660.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |
| February 2005 FAMILY LIMITED PARTNERSHIPS AND GIFTING by James R. Modrall III, J.D., C.P.A. |