Limited partnerships (LP’s) and limited liability corporations (LLC’s) remain popular estate planning devices due to their ability to save on gift and estate taxes. However, many families derive other benefits from the arrangements which should be taken into account before dissolving the entity. First and foremost, LP’s and LLC’s offer excellent limited liability to the owners of the entities which should be taken into account before making a decision to change business structure. Unintentionally exposing one’s self to liability could end up costing more than any benefits that were derived from any change that was made. The limited ability to transfer shares, be they minority or controlling, is also as appeal as it will keep the business in the family while usually providing a buyout mechanism for anyone that wants to sell.
However, there are some downsides as well, with the estate tax exclusion being set at such a high level the tax saving potential is much reduced and the discounted valuation of the shares in the LP or LLC may increase capital gains tax in the future due to the lower stepped up basis received at death. Ultimately, if there is an estate planning situation involving a decision about the future of a family partnership, all factors must be taken into consideration because one supposed benefit may be more than offset by unexpected downsides.
See Martin Shenkman, Dissolving an FLP/LLC: Part I, Wealth Management, July 20, 2015.
Special thanks to Jim Hillhouse for bringing this article to my attention.
