You May Avoid Estate Tax In Washington State By Gifting Through A Family Limited Partnership, Family LLC
One method of avoiding estate tax is through a Family Limited Partnership. In fact, “Family Limited Partnership” is often a misnomer, because the entity formed is usually a Family LLC instead.
Regardless, the purpose and function are the same. The Family LLC allows Mom and Dad to (a) form an LLC owned only by the two of them, (b) transfer property they own, such as real estate, into the Family LLC, then (c) gift ownership interest in the LLC to their children and/or grandchildren. Despite gifting interest in the Family LLC, Mom and Dad can retain control over all the assets in the LLC. For example, if all the property in the LLC is real estate, Mom and Dad get to determine when and if it is sold or rented, to whom, and for what price. Mom and Dad can also appoint one or more additional “managers” for the Family LLC, meaning Mom and Dad can control who will manage the assets of the LLC when they die or become incapacitated.
Over time, this gifting reduces the size of Mom and Dad’s taxable estate. Plus, by properly applying “discounts” to the value of their interest in the Family LLC, Mom and Dad can also gift more than they may think they can. For example, say the real estate’s fair market value is $100K and Mom and Dad have already gifted away a total of 10% to their children. Mom and Dad’s 90% fractional interest in the Family LLC is not worth $90K. Rather, because such fractional interest is worth less on the open market than $90K, Mom and Dad may apply a discount to the value of their interest. 20% is a conservative discount. If such discount is applied, Mom and Dad’s 90% interest is worth only $72K, allowing them to gift a higher percentage of Family LLC interest than they might have thought they could without exceeding the annual gift tax exclusion (which is $14,000 per person in 2013).
Gifting membership interest in a Family Limited Partnership / Family LLC can be a very effective tool for avoiding estate tax by shrinking a taxable estate, all while allowing the gifting party to retain control over the assets in the Family LLC.
If you have questions about estate taxes or gifting, please call William O. Kessler or one of the other lawyers in the Beresford Booth’s Estate Planning and Probate Group. In addition to your Estate Planning & Probate Law needs, the attorneys of Edmonds Washington law firm Beresford Booth are available to serve your Business & Real Estate Law, Divorce & Family Law and Litigation needs.
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