A Family Limited Liability Company Vs A Family Limited Partnership

A family limited liability company (FLLC) and a family limited partnership (FLP) are legal entities set up to help manage family assets, afford protection from creditors, and help reduce estate and gift taxes for transferring family wealth. Understanding how they benefit you is very important taxwise.

Forming an FLLC may be more favorable than an FLP since its manager isn’t personally liable as is the general partner of the FLP. Otherwise, they perform quite similarly.

You establish an FLLC by transferring your property to it in exchange for a 100% member interest in it. You initially manage the FLLC with sole control over it and its property. Later, you begin gifting a portion of your member interest to your children. But you can retain complete control over the day-to-day investment and management decisions of its property. The children’s ‘say’ can remain limited.

Control of the FLLC’s assets can remain with the parent(s) until their death. Or you can parcel control out to other members as you see fit.

The FLLC provides asset protection from creditors by limiting claims to the FLLC – but not to the other holdings of FLLC members. You can limit any claims – such as from a divorce spouse with a judgment – against a member to only a charging order against the benefits the member’s interest. The FLLC manager regulates that benefit though.

Transferring interest in the FLLC to a child constitutes a gift which can trigger a gift tax. And when a member dies, his interest is subjected to estate tax. These taxes are based on the ‘value’ being transferred or remaining at death. But that value can be significantly ‘discounted’ because of restrictions that the FLLC imposes on the assets it holds. Discounts accrue for lack of marketability when assets must remain within the FLLC, or from limited or ‘no say’ about asset use that limited members might hold. Discounted value results in reducing gift or estate taxes that apply.

Yearly transferring of FLLC can use the $14,000 annual gift tax exclusion (2014) to pass perhaps $20,000 of FLLC interest if 35% of it is discounted. Excess gifting can be discounted at the final gift tax exclusion. And if you transfer most of your interest and control in the FLLC before death, you leave little subject to estate tax.

Be warned that the federal government recognizes all FLLCs and FLPs as business entities. Therefore, to sustain the discounting and protection capabilities that you seek from these, you better maintain a business purpose to them and carry through all requirements as they come due. A business purpose can be expert management of the FLLC assets by a manager.

The use of either the FLLC or the FLP can save you a lot of taxes and maintain the control over your assets you desire.

Shane Flait helps you with your financial legal, tax, and retirement goals.
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Article Source: https://EzineArticles.com/expert/Shane_Flait/300843

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