Limited liability company structures can help your clients save on their personal taxes, especially estate taxes.

Among these types of structures, a family limited liability company or a family limited partnership can help minimize estate taxes, according to BNY Mellon Wealth Management. Such vehicles let a family manage multiple interests, preserve parental control and protect assets from claims of creditors and divorcing spouses, among other benefits.

“Family LLCs are a popular tool for protecting assets but also offer a means to reduce estate tax and shift income to ... family members,” said Lisa Cappiello, director, Personal Wealth Advisors, at EisnerAmper in New York. “The qualified business income and pass-through entity tax deductions may add significant benefits to members of family LLCs.”

Family limited partnerships are essentially holding companies owned by two or more individuals, with two classes of owners: general partners (the parents) and limited partners (the heirs), said Jon Ekoniak, managing partner at Bordeaux Wealth Advisors in Menlo Park, Calif.

General partners’ contributed assets are no longer considered part of their estate and any future appreciation on the assets escape the estate tax, Ekoniak added.

“You can generally separate [an] LLC into three components: control,  equity, cash flow. Due to this separation, it’s possible to maintain control of personal/business assets while simultaneously transferring non-controlling equity of the assets to someone else,” said Jason Hemsley, wealth advisor at Gratus Capital in Atlanta. “The transfer can be done via a gift, a sale or a combination.

“Another aspect of separating control, equity and cash flow is that transfers of non-controlling equity could qualify for a discount on the value for tax reporting. This is a great way to minimize any gift or estate tax consequences of the transfer,” he said. “In general, discounting business entities with very liquid assets is not advisable [but] illiquid assets could warrant a discount as high as 40%.” 

These structures can get complicated; expert help is usually needed. “An expense does not become deductible just because you paid it out of an LLC,” said Jason Hoffman, a CPA and partner at Janover LLC in New York. “You need to properly structure the LLC to be considered a trade or business.”

“Family LLCs are legal entities requiring a legitimate business purpose. There are federal and state tax implications to the LLC and its members, and the integrity of the LLC must be maintained,” Cappiello said.

Though the IRS has sometimes been vague about defining trade or business, a few court rulings provide a roadmap of what to do, Hoffman added.

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