Nelson H. Howe II, in addition to his banking clients, represents grantors, trusts, and guardianships/conservatorships concerning investments and other trust administration matters, handles probate administration, and advises individuals and small business owners on estate planning, asset protection, and family succession planning. Rhonda A. O'Brien practices in the areas of business transactions, employee benefits/ERISA, and finance. Ms. O'Brien counsels concerning state, local, and federal taxation matters including income tax, excise tax, fuel tax, sales and use tax, real estate and personal property tax, and utility taxes.

The federal estate and gift tax on wealth transfers is a significant economic impediment in planning for the succession of closely held businesses and the transfer of wealth from one generation to the next. Currently, marginal tax rates are as high as 55 percent for gift and estate taxes, and there is a 55 percent flat rate for generation-skipping transfers.

A Family Limited Liability Company ("FLLC") or a Family Limited Partnership ("FLP") ("Family Entity") may provide both tax minimization and non-tax asset protection benefits for a family that intends to keep family business assets within the family. Proper planning is necessary to accomplish the family's business and personal estate planning goals and to generate significant tax benefits.

Family Entities are structured like other limited liability companies or limited partnerships, but ownership is held only by family members. In a FLP, the general partner is usually the current owner of the family business, and the limited partners are the owner's beneficiaries. The parent/owner transfers family assets (i.e. family business, commercial real estate, residential real estate, or securities) to the FLP in exchange for the general and limited partnership interests. In a FLLC, the transfer occurs in exchange for the FLLC membership interests. The owner in the Family Entity retains voting control and management rights. Over time, the owner transfers, by way of gifts, the equity ownership to the beneficiaries.

The tax advantages of using a Family Entity may be significant.

Income Tax: Income shifting from higher to lower tax brackets may occur since the Family Entity is a pass-through tax entity.

Gifting: A Family Entity may be an excellent tool to facilitate the gifting of indivisible assets with the donor retaining some degree of control.

Estate and Gift Taxes Discount Valuation Planning: An important tax reason for establishing a Family Entity relates to discount valuation planning. Family Entity ownership interests passed to the younger generation are minority interests which lack marketability and free transferability and do not allow for management participation, thereby having a reduced value for estate and gift tax purposes. Reasonable valuation discounts are available when Family Entities are used in an active business setting.

The non-tax advantages of using a Family Entity are also significant.

Maintaining Control/Centralized Management/Asset Consolidation: The general partner or managing member maintains the desired control and, therefore, the assets. Consolidating family assets within the Family Entity facilitates asset transfer, management, diversification, and reduces the costs of reporting and compliance.

Communication: The agreement may institutionalize communication of family business and financial matters and provide a means for younger family members to learn the family business.

Flexibility: The agreement which governs the operations of the Family Entity may give to the general partner or managing member the flexibility to manage the assets, reinvest cash flow, and control cash distributions. These agreements may be amended from time to time to reflect new conditions of the family and the business.

Asset Protection: FLLCs and FLPs may provide protection from creditors as to the assets transferred to the Family Entity. Only the member's or partner's equity interest is subject to the creditors' claims. Similar protections may be included to guard against an estranged spouse.

Probate Avoidance: Assets owned by the Family Entity are not subject to probate upon death. The partner's or member's individual interest may be subject to probate, however, unless such interests are titled in a trust.

Transferability: A FLP or FLLC may restrict subsequent transfer of ownership interests in order to make it difficult for a family member to transfer assets to a non-family member.

There are significant costs to create and use a Family Entity in this fashion. The cost to establish and maintain a Family Entity includes: appraisals to support the discounted value, fees in connection with tax planning and drafting the contractual provisions of the organizational and operating documents, fees for estate planning for family members, asset transfer costs and, in some states, real estate transfer taxes. The Family Entity must file an annual tax return.

Another potential disadvantage is the loss in the step-up in basis for the assets transferred to the Family Entity, because there is no step-up in basis in the parent's contributed property when a gift is made.

In our experience, the overall tax savings received from the appropriate use of a Family Entity has been significantly greater than the costs involved with establishing and maintaining a Family Entity.