Consolidating Management of Business or Property Using an LLC or a Family Limited Partnership

Using an LLC or a Family Limited Partnership to Protect Your Business and Your Estate

By Denice A. Gierach
September 2010

Baby boomers over time have acquired various parcels of real estate, or are participating in a number of businesses. In order to minimize their estates for estate tax purposes, they may be gifting minority interests in these entities to their children as the tax law may allow.

For instance, a person may gift an amount of $13,000 per year per person with no use of the lifetime exemption. If the person is married, the spouse may join in with the person and then the annual exemption is effectively $26,000 per year per person. While this may make sense from an estate tax standpoint to make gifts that will reduce that person’s estate, from a business standpoint it may not make sense. For instance, when the parent wishes to sell the real estate or to sell the business, does the parent need to consult with and get the approval of the child? This may be especially problematic if the child is over 18 and “has a mind of his own.”

A better result may be to use a limited liability company (“LLC”) or a family limited partnership to hold the real estate or business interests. The parent will form the LLC or the family limited partnership for the purpose of consolidating the management of the properties or businesses. The parent will have their lawyer prepare either an operating agreement, in the case of the LLC, or a limited partnership agreement, in the case of the family limited partnership, which will give the parent full rights to manage and control all aspects of the property, subject to the terms of the agreement. This agreement may also provide for a successor to the parent, if that parent is deceased. The parent who probably has a living trust will title the membership interest in the LLC or the partnership interest of the family limited partnership in the name of the living trust. In effect, if the parent is no longer able to act or is deceased, his or her successor trustee will control the entity.

The title to the property or the interest in the business is then titled in the name of the LLC or the family limited partnership. Again, the parent usually wishes to control the management of the property or business as long as he or she is able. Many times, too, the parent wishes to have one or more of his or her children learn how to manage the business, especially if the parent may wish to leave such businesses or real property to his children. In using the LLC or family limited partnership in this manner, it will assist in how the business is managed after the parent dies. It may preclude conflict among the children after death, as one or more of the children were put in charge of managing the business while the parent was still alive.

The parent is in control of when distributions are made from the LLC or the family limitedpartnership. This may be important as the parent, as the manager of the LLC or family limited partnership, may deem it appropriate to take distributions from the businesses or real estate and reinvest it into those entities for improvements that need to be made or to invest in another opportunity that the parent, as manager, may determine is appropriate.

The parent may wish to gift part of his or her interest in the LLC or the family limited partnership. The parent would be gifting a small part of the membership interest in the LLC or a small interest in the family limited partnership. The property or business held by the LLC or family limited partnership would be valued for gift tax purposes. Then the gifted portion of the LLC or family limited partnership would receive a discount for the minority interest and the lack of marketability for that interest. As a result, the parent may be able to give a little higher percentage to their children, further lessening the value of the parent’s estate.

The use of LLC’s and family limited partnerships is a flexible way for a family to manage its business and real estate holdings. It can also be an effective way to transfer wealth at the least cost to its owner.

Denice Gierach is a lawyer and owner of The Gierach Law Firm in Naperville. She is a certified public accountant and has a master’s degree in management.