Sheltering Growth From Estate and Gift Taxes

Family Limited Partnerships and Family LLCs:
Sheltering Growth From Estate and Gift Taxes
by John V. Ivsan
Shumamker, Loop & Kenkdrick

Introduction

A problem inherent in most family businesses involves the issues of succession and taxation. As a family business continues to grow, the business becomes an increasingly valuable asset in the hands of the elder family members. If the business remains in a parent’s estate, upon death there may be significant estate taxes, as well as liquidity problems involved with paying those taxes. The parent’s estate may be compelled to sell valuable assets to pay for estate taxes, jeopardizing the family business and leaving heirs with a diminished estate.

Parents are often reluctant to remove a family business from their estates.Typically, a parent does not want to part with management control over the family business, risking the fortunes of a growing enterprise with children who may be less experienced at the business.Additionally, many traditional forms of transferring ownership of the family business from parents to children are subject to high levels of gift tax.

The explosion in popularity of family limited partnerships (“FLPs”) in the past few years as a solution to these problems can be attributed to the versatility that a FLP offers to a family business.By contributing their interests in a family business to a FLP, parents may transfer future ownership and control of the business to their children at a substantially reduced transfer tax cost while at the same time permitting the parents to retain control over the business. More…