Individual Income Tax Planning with a FLP/LLC

ReedW. Easton (Seton Hall University School of Business) has recently publishedhis article “Individual Income Tax Planning with aFLP/LLC” for the March/April 2006 Business Entities Journal. 8 NO. 2 Bus.Entities 24. Here is the abstract:

Family Limited Partnerships (FLPs) and LimitedLiability Companies (LLCs) are commonly used by individuals with large estatesto transfer securities and real estate to members of their family with reducedgift or estate tax consequences due to valuation discounting. The valuationdiscounting associated with the FLP/LLC technique results from the lack ofcontrol and lack of an established market for the limited partner (LP)interests or nonvoting membership interests. The reductions to the value of theinterests in the FLP or LLC may range from 15% to over 50%, depending on thespecific facts and circumstances.

However, FLPs and LLCs may not be as attractive asthey once were for transfer tax purposes because of recent successes that theIRS has had in challenging these structures. But, despiteunfavorable case law, the use of a FLP or an LLC as an income tax planning toolshould not be overlooked.

This article presents a planning idea that uses a FLPor an LLC structured to defer or shift the recognition of imminent gains fromthe sale of partnership property. This deferral or shift, coupled with anestate tax deduction under Section 691(c) or additional estate tax deductionsresulting from the increased income tax liability of the decedent, can resultin significant savings. While the idea is not free from risk, if structured properly,significant income tax deferral can be achieved with very little downside risk.The suggestion contained herein was derived from a particular clientengagement.