Bay Area Estate And Tax Planning Law Firm

FLPs and LLCs discount asset values to reduce estate taxation

On Behalf of | May 31, 2023 | Estate Planning |

Affluent families in California have a strong interest in reducing their tax obligations through estate planning. A couple or a family could form a family limited partnership (FLP) or limited liability company (LLC) to manage estate gifts and asset transfers in a tax-advantaged manner. These legal structures achieve tax reductions by transforming individual ownership of assets into shares of ownership held by partners or members.

FLP structure

Two or more family members may create an FLP and contribute assets that are likely to appreciate into the partnership. Those who contribute the most assets become general partners. In this position, you manage the partnership’s assets but also bear liability. The partners with fewer holdings have the status of limited partners. Their liability cannot exceed the value of assets contributed.

LLC structure

After working through various estate planning options, you may decide that forming an LLC meets your goals. With this route, family members form an LLC. You contribute assets to the entity and become shareholders in the company. Like a corporation, your membership status shields you from liability.

How an FLP or LLC controls taxation

Both legal entities attain ownership of the assets contributed. This action changes the assets from something with a measurable market value to shares or partnership interests that are illiquid. No market exists for them because you created them for your internal family purposes. Their illiquidity will generally force the Internal Revenue Service to discount valuations when the time comes to calculate taxes.

You control taxation for capital gains while retaining control of the assets. As for heirs, these entities also shield wealth transfers from estate taxes. Families also use these legal entities to consolidate their holdings and prevent losses to creditors or divorce settlements.