Learn about the critical differences between these two legal entities, both of which can help families transfer wealth.
A Family Limited Partnership or Family Limited Liability Company is a legal entity created among family members. FLPs and FLLCs provide an excellent vehicle to centralize the management of assets, protect against creditors, reduce administration expenses of investments, and expose younger family members to the investment and management of assets. In some states, the law favors FLLCs over FLPs.
Likewise, the ownership and transfer of interests may have restrictions attached. This is referred to as marketability discount and may cause the value of the partnership interest to be less than the underlying value. Valuation discounts are especially useful for taxpayers because they provide gift tax leverage; that is, more assets may be gifted under the annual exclusion or exemption than otherwise would be possible.Parents form an FLLC and transfer $100,000 to it.
FLPs and FLLCs are complex financial techniques that when designed too aggressively may attract the attention of the IRS. Clients considering an FLP or FLLC must do so with extreme caution and with the consult of qualified legal counsel.Discounting has gift and estate tax benefits, although see the caution below
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