No one can predict the future. As more Americans become entrepreneurs, they discover that wise business planning is essential to their success today and their financial security tomorrow. Some of our clients desire protection from unknown and unanticipated future creditors, and we assist our clients in identifying circumstances where they may be subject to excessive litigation risk.
Smart planners consider all the options, and take action to avoid future harm. If a client feels the need to protect assets from unknown creditors, we provide planning options that help minimize that risk. Part of smart planning is setting up structures in the early stages of business and estate growth that will protect your assets against unknown liability in the future.
A Family Limited Partnership (“FLP”) is a type of partnership that can be useful in bringing order to a complex estate. An FLP can centralize management in order to avoid the age old problem of “too many chefs in the kitchen.” In addition to creating a platform for simplified management, an FLP can be useful for estate planning and asset protection. Parents can use FLPs to safely and effectively transfer ownership to heirs while maintaining some level of control. FLPs can be useful tools for parents to bring in their children to the management of their business, while ensuring a smooth transition by allowing the parents to mentor their children with the years of expertise that many family business owners have. We can help you determine if this type of entity makes sense for your business and family.
Transferring limited partnership interests to family members can reduce the taxable estate of senior family members. Senior family members can sell or gift interest in a FLP to others, including children. This can allow for a gradual transfer of ownership, in order to bring in additional owners and help younger generations become part of the company. These tools and entities can greatly enhance a family business or real estate portfolio’s ability to enjoy continued success.
Transfers of limited partnership interests are also eligible for the annual gift tax exclusion, a powerful tool for reducing income, gift and estate taxes. The value of limited partnership units can be discounted based on attributes like lack of marketability and lack of control. The discounted nature of these units can achieve tax benefits as it relates to both gift and estate planning. In addition, because of a FLPs flexibility, the family members who are owners can usually amend the partnership agreement as family circumstances change.
A FLP can be used to protect assets from claims of future creditors as well as future ex-spouses. Creditors will not be permitted to force cash distributions, vote, or own the interest of a limited partner, without the consent of the general partners. And in the event of a divorce, where a limited partner ceases to be a family member, the partnership documents can require a transfer back to the family for fair market value, keeping the asset secure within the family.
By combining investments together into a FLP, a family’s investment fees can be significantly reduced. For example, instead of maintaining separate brokerage accounts or trusts for each child, the partnership can hold one brokerage account, and the children or their trusts can own partnership interests.
Tax flexibility and liability protection are the hallmarks of this legal tool. An LLC may elect to pass gains or losses, credits or deductions, on to the members of the LLC in much the same manner that partnerships are taxed. An LLC company can be selected to avoid the corporate tax problem of “double taxation.” Individual members may benefit from a reduction in their taxable income if the company operates at a loss. Despite their flexible tax treatment, LLC’s can maintain corporate attributes such as limited liability. With proper formation and operation, an LLC can provide the Members, including the Managers, with protection from personal liability for the debts of the LLC, and even the acts of other Members. If we determine that a Limited Liability Company is appropriate for you, we can begin the planning and procedures.
Limited Liability Companies are the most common form of business entity today. They can also be powerful tools for estate planning. A Family Limited Liability Company, in this context, is held among family members and allows joint ownership of family-owned assets. The structure of the company permits a member to transfer a portion of his ownership of the assets held within the company to other family members who are members to the agreement. The use of the LLC to make such lifetime gifts, as well as transfers at death, lays the groundwork to obtain a potential discount (valuing a company interest at something less than face value) on the value of the transfers. In addition, holding family assets in a LLC can provide a level of protection from creditors of the company and of individual members.
The members’ liability is also limited. For example, a member of the company may only be responsible for company liabilities to the extent of the value of their individual company interest. By comparison, in an unincorporated business, the owners have liability for all of the activities of the company, and that liability is not restricted to the value of the company interest of each owner. This is sometimes referred to as joint and several liabilities.
We use Buy-Sell Agreements to help our clients achieve goals as they pertain to tax planning and operation of their family businesses. We provide most of our services with the goal of giving you the peace of mind of knowing that your estate planning desires are being fulfilled. With careful planning, your children will be provided for according to your desires, and your legacy will be passed on in the manner that you desire.
Today’s litigious society means that many people end up in a court battle through no real fault of their own. For many business men and women, the question is not whether you have been sued, but WHEN will you be sued. The costs of defending frivolous lawsuits can quickly reach the thousands. As you build wealth, it is important to maintain lines of protection between the various assets of your estate. Keeping business and personal assets separate from both liability and tax standpoints is an important goal in our office. Our intention is to help you set up entities that will allow you the flexibility to continue the management of your assets while keeping an eye on minimizing taxes. We do this for our clients while placing much concentration and expertise on their and their families’ long-term planning goals.