INCOME TAX ADVANTAGES OF FAMILY LIMITED
PARTNERSHIPS AND LIMITED LIABILITY COMPANIES
(4/15/01)

Over the past couple of weeks, I've discussed ways you can pass your family business down to your family members when you die. I've also discussed some advantages of using a Family Limited Partnership (FLP) or Limited Liability Company (LLC) as part of your estate plan, which has the potential to reduce the estate tax at your death.

This week, I want to discuss some additional advantages of using these common business entities.

Used correctly, either of these entities can be income tax friendly. Since a partnership or LLC is not a taxable entity, you will report your income, losses, deductions and credits on your individual tax return. If there are several owners, you dilute the tax burden by allocating the income or loss among everyone. This spreads out the income and expenses among the various taxpayers, each of whom should have dependency exemptions or itemized deductions to help offset the taxable income. They should also qualify for a lower tax bracket than the entity or trust.

If the General Partner or LLC manager is paid for his or her services, this qualifies as earned income even though it comes from interest, dividends or capital gains earned by the entity. Even if this is his or her only income, the General Partner or manager will be able to contribute to a qualified retirement plan or IRA and benefit from tax-deferred earnings.

Are there any savings in the Estate Tax?

As I mentioned last week, an FLP or LLC may qualify for "Valuation Discounts", such as lack of marketability and lack of control, which will decrease the total value of your estate. Remember, though, the IRS habitually challenges these discounts and there have been several legislative attempts to change the current rules. On the other hand, the discounts are grounded in solid economic principles which Congress has had a hard time legislating out of existence

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