ESTATE planning for sophisticated individuals with significant net worth should consider using family business entities, primarily for income, gift, and estate tax planning, and even tax saving through valuation discounts and asset protection.
Indeed, under the American Tax-prayer Relief Act of 2013 (ATRA), the 2013 exemption for each of the estate, gift, and generation skipping transfer taxes is $5,250,000.
Use of Gift/Estate Exemption & Valuation Discounts
Family business entities such as family limited partnership (FLP) family limited liability company (FLLC) or closely-held corporation allow the individual to give away assets that will use the $5,250,000 exemption amount of gift, estate, and generation skipping transfer tax, or a large portion thereof.
Moreover, such family business entities further generate tax savings due to valuation discounts, because the fair market value of a minority (uncontrolling) interest in such business entities is usually less than the corresponding proportionate share of the value of the assets of the entities.
Tax savings are further realized because the future appreciation value of such transferred assets are taken out of the individual’s estate.
And such family business entities may also serve as asset protection, especially to an individual with high net worth.
Family Limited Partnership (FLP)
The term “family” before limited partnership in family limited partnership (FLP) has no legal meaning and may be treated by the Internal Revenue Service as “aggressive” gift and estate tax planning warranting “heightened” scrutiny.
The California Corporation Code describes a partnership as an association of two or more persons as co-owners in a business for profit.
A limited partnership under the California Limited Partnership Act of 2008 is a type of partnership in which one or more partners are general partners with unlimited personal liability due to control of the limited partnership, and one or more limited partners with no personal liability because of lack of control of business decisions.
In California, a limited partnership is formed by filing Form LP-1, Certificate of Limited Partnership, with the Secretary of State, and is charged with an annual franchise tax of $800.
A general partner may be a corporation or limited liability company formed by the elder generation of the family who seeks protection from personal liability.
Family Limited Liability Company (FLLC)
A limited company is a hybrid business entity of the corporation and partnership. In California, a limited liability company (LLC) can be formed by a single member. As a family business entity, a family limited liability company will be managed by one or more managers stated in the Operating Agreement.
Just like a corporation, a limited liability company provides limited liability for all its members, including managers who may not be members, and officers for any obligation, judgment, or liability of the LLC.
But just like shareholders of a corporation, limited liability company members may have personal liability under the alter ego or piercing the veil doctrine, due to commingling of funds, under- capitalization, or fraud.
In California, a limited liability company (LLC) is formed by filing Form LLC-1, Articles of Organization with the Secretary of State, and is subject to an annual franchise tax of $800, and an annual fee of $900 on gross income of $250,000 or more; $2,500 on income of $500,000 or more; $6,000 on income of $1M or more; $11,790 on income of $5M or more in California.
In conclusion, whether a family limited partnership (FLP) or a family limited liability company (FLLC) is chosen would depend on factors more important to the family members: (1) limited liability to all members; (2) participation in management; (3) annual franchise tax and fee on gross income); and (4) receipt of valuation discount.
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Roman P. Mosqueda has practiced criminal defense and Immigration law for over 20 years. He is a long-time member of the California Public Defenders Association. , and trained as a prosecutor with the Los Angeles City Attorney under the Trial Advocacy Program of the Los Angeles County Bar Association. He is also a volunteer, State-Bar trained arbitrator on attorney’s fees dispute resolution. Send comments or inquiries to [email protected] , or call (213) 252-9481 for free consultation appointment, or visit his website at www.mosquedalaw.com
