Family Limited Partnerships and Limited Liability Companies discusses income and transfer tax considerations and nontax considerations relating to the formation, operation and termination of family limited partnerships and limited liability companies (LLCs). Written by Louis A. Mezzullo, Esq., Luce, Forward, Hamilton & Scripps LLP, this Portfolio includes a general discussion of the goals of family members in establishing limited partnerships and LLCs, the various techniques available for reducing or eliminating transfer taxes, and the income tax rules pertaining to the recognition of an entity as a partnership for federal income tax purposes.

This Portfolio explores valuation issues, including the various discounts or premiums that may apply to transfers of interests in limited partnerships and LLCs. It discusses the validity of a partnership or LLC formed for the purpose of holding marketable securities and the Internal Revenue Service's challenges to valuation discounts. Also covered are the special valuation rules under Chapter 14 as they apply to family limited partnerships and LLCs.  Family Limited Partnerships and Limited Liability Companiesdiscusses the availability of the annual exclusion for transfers of interests in family limited partnerships and LLCs and the potential inclusion of transferred interests in the transferor's estate.

Family Limited Partnerships and Limited Liability Companies also examines the issues involved in choosing the appropriate entity for holding family assets, including marketable securities, real estate, and operating businesses. It contains a detailed discussion of the desired characteristics of the family business entity. This Portfolio covers issues involved in forming and liquidating the entity, including the potential application of the anti-abuse regulation under the partnership rules, tax-free formation treatment, and classification of the entity for federal tax purposes. This Portfolio contains a discussion of the issues that should be considered when drafting the limited partnership agreement or operating agreement. Finally, this Portfolio discusses business reasons for a family to use a limited partnership or LLC to hold family investments and operating businesses.

Family Limited Partnerships and Limited Liability Companies allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents including tables, charts and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
• Alternative approaches to both common and unique tax scenarios

This Portfolio is part of the Estates, Gifts and Trusts Portfolios Library, a comprehensive series containing more than 80 Portfolios, which covers critical transactions in estate, gifts and trusts planning. This highly-regarded resource library offers commentary on a wide range of estate planning topics including: Generation Skipping Tax, Family Limited Partnerships, Charitable Remainder Trusts, Estate Planning for Closely-Held Businesses, Exempt Organizations and Private Foundations, Life Insurance, Valuation, and more.

Detailed Analysis

I. Introduction

A. Goals

B. Techniques

1. Trusts

2. Business Entities

C. Reducing Transfer Taxes

1. Lifetime Giving

2. Discounts and Premiums

II. Recognition of Family Partnerships and LLCs for Income Tax Purposes

A. Introduction

1. Case Law and IRS Position Before § 704(e)

2. Congressional Response to Culbertson

B. Regulations Under § 704(e)

1. In General

a. Donee Partner

b. Real Ownership

c. Capital as a Material Income-Producing Factor

d. Capital Interest

e. Motive

2. Basic Tests as to Ownership

a. General Principles

b. Relevant Factors

(1) Retained Controls

(2) Indirect Controls

(3) Participation in Management

(4) Income Distributions

(5) Conduct of the Partnership's Business

c. Trustee as a Partner

d. Minor Child as a Partner

e. Limited Partners

3. Allocation of Family Partnership Income

4. Purchased Interest

III. Valuation Issues: In General

A. Introduction

B. Lack of Control Discount

C. Lack of Marketability Discount

D. Premiums

E. Going Concern Value v. Liquidation Value

F. Valuing Interests Held in Specific Entities

1. Corporations

2. Limited Partnerships

3. LLCs

G. Business Appraisals

H. Marketable Securities

I. The IRS's Challenge

1. The TAMs

2. Schauerhamer and Later Decisions- The § 2036(a) Approach

3. More Recent Cases

4. IRS Appeals Settlement Guidelines

IV. Special Valuation Rules

A. Introduction

B. Transfers of Partnership and LLC Interests

C. Transfers of Interests in Trusts

D. Rights or Restrictions

E. Lapsing Voting and Liquidation Rights

F. Applicable Restrictions

V. Other Transfer Tax Issues

A. Annual Exclusion

B. Retained Interests or Powers

C. Section 2036(b)

D. Additional Transfer Tax Issues

1. Gift on Formation

2. Marital Deduction

3. Section 2035 Transfers

VI. Choice of Entity

A. Introduction

1. Significance of Issue

2. Tax Issues

3. Nontax Issues

4. State Law

5. Types of Entities

6. Disregarded Entities

B. Desirable Characteristics

1. Nontax Characteristics

a. Limited Liability

b. Retention of Control

c. Continuity of Life

d. Restrictions on Transferability

e. One Business Entity

f. Restrictions on Voting and Management Rights

g. Protecting Assets from Exposure to Liability

h. Protecting Assets from Creditors of the Owner

i. Simple and Inexpensive

j. Dealing with Recalcitrant Family Members

2. Tax Characteristics

a. Partnership Tax Treatment

b. No Restrictions on Ownership

c. No Restrictions on Capital Structure

d. Tax-Free Formation

e. Tax-Free Contributions

f. Tax-Free Withdrawals

g. Adjustment to Basis

h. Discounts and Premiums

i. Self-Employment Tax

VII. Formation and Liquidation Issues

A. Introduction

B. Anti-Abuse Regulation

C. Tax-Free Formation

D. Classification

E. Avoiding an Indirect Gift When Funding the Business Entity.

F. Liquidation Issues

1. In General

2. The Gain Provisions

a. Built-In Gain

b. Marketable Securities Treated as Money

c. Precontribution Gain

3. Disproportionate Distributions

4. Avoiding Gain on Distributions

VIII. Drafting Issues

A. Introduction

B. Important Provisions in the Operative Agreement

1. Business Purpose

2. The Economic Arrangement Among the Partners or Members

3. The Management Structure

4. Dissolution and Liquidation

C. Classification for Income Tax Purposes

D. Self-Employment Income

E. Estate Planning Issues

1. Special Valuation Rules

2. Gift and Estate Tax Issues

F. Other Tax Considerations

1. Cash Method of Accounting

2. Special Allocations

3. Contributions of Appreciated Property

4. Family Partnership Rules

5. Constructive Termination of the Entity

6. Basis Adjustments

7. Tax Matters Partner

8. Passive Loss Rules

IX. Business and Other Nontax Reasons for Using Limited Partnerships and LLCs

A. Introduction

B. Retaining Control over the Business

C. Reduced Expenses

D. Protection from Creditors

1. Protection of the Owners

2. Protection of Entity's Assets from Owners' Creditors

E. Investment Policies

F. Dealing with Disputes

Working Papers

Table of Worksheets

Content

Worksheet 1 Example of Tax Savings Using Real Estate in an LLC

Worksheet 2 Example of Tax Savings Using Marketable Securities in an LLC

Worksheet 3 Sample Limited Partnership Agreement

Worksheet 4 Sample Certificate of Limited Partnership

Worksheet 5 Sample Deed of Gift for Limited Partnership Interest

Worksheet 6 Sample Letter to Client Explaining Provisions of Limited Partnership Agreement

Worksheet 7 Sample LLC Operating Agreement (Manager-Managed)

Worksheet 8 Sample LLC Articles of Organization

Worksheet 9 Sample Consent of LLC Organizer

Worksheet 10 Sample Deed of Gift for LLC Interest

Worksheet 11 Sample Letter and Memorandum to Client Explaining Provisions of LLC Operating Agreement

Worksheet 12 Appeals Coordinated Issue Settlement Guidelines

Bibliography

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State Cases:

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