Plan Your Own Estate: Passing on Your Assets and Your Values Legally and Efficiently by Deirdre R. Wheatley-Liss

Author:Deirdre R. Wheatley-Liss [Wheatley-Liss, Deirdre R.]
Language: eng
Format: epub
ISBN: 9781430244943
Publisher: Apress
Published: 2012-12-20T05:00:00+00:00

FLP/FLLC: Family Limited Partnership/Family Limited Liability Company

This technique relies on the concept of valuation discounts. What does this mean? Let’s say I have share of stock in Facebook that I want to sell and you want to buy (bless you). The stock is trading at $17.73. How much are you likely to pay for it? Well, $17.73, because if you didn’t pay me that, I’d sell the share to someone who would.

Now, suppose I’m willing to sell the share of Facebook to you, but I have some conditions: you can’t ever sell the stock to anyone else, I control when you receive any dividends, and you can’t use the stock as security for a loan. Would you still pay me $17.73 for that stock share? Probably not. You might be willing to pay me $11 or $12, though. That is the essence of a valuation discount: when you’re looking at the FMV, you need to consider what a willing seller would accept and a willing buyer would pay. This includes restrictions on the item that make it unpalatable, such as a lack of control or a lack of marketability.

How does this work in the estate planning context? Mark and Debra own a ranch that they want to begin transferring to their kids (in a GST trust, of course), and they’re looking for a way to get the most bang for their buck in making the transfer. The ranch is worth $3 million, and they each want to use their full lifetime gift tax exclusion of $1 million each. If they make a plain old gift, they can give away $2 million (or 66 percent of the ranch), leaving $1 million in their taxable estate.

What if, instead, I sit down with Mark and Debra and suggest that they contribute the ranch to a family limited liability company (FLLC)? The FLLC has two types of ownership interest: managing member, representing 10 percent of the FLLC; and non-managing member, representing 90 percent. The non-managing member ownership interests have no control over the management of the ranch or the distribution of its profits (a “lack of control”). The non-managing members also can’t sell their ownership interest to anyone else (a “lack of marketability”).

Mark and Debra will still give away $1 million each. Now, however, they’re giving away $1 million of non-managing member interest in the FLLC instead of just part of the ranch. The non-managing member interest is less attractive to a buyer, just like in my Facebook example above. If a buyer discounts their offer by 25 percent to reflect the lack of control and the lack of marketability, then Mark and Debra can apply that same 25 percent discount to the value of the gift. Remember, FMV is what a willing seller and willing buyer in possession of all the facts would arrive at as the value of an item. If a 25 percent discount is applied to the non-managing member interest, then it’s worth less. This means that $1 million of gift tax exemption could “buy” more of the non-managing member interest.

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