One of the most widely used estate planning strategies for freezing the value of assets may be coming under attack from proposed IRS regulations, which may be released as early as September. Many estate planners suggest the use of Family Limited Partnerships (FLPs) and Family Limited Liability Companies (FLLCs) to get family members involved in the family business or in the family's real estate operations. By using discounts for lack of marketability (DLOM) and discounts for lack of control also known as a minority interest discounts (DLOC), estate valuation experts and appraisers have been able to value percentage interests of assets gifted to heirs at favorable values for estate and gift tax purposes (for DLOM anywhere from 20-35% and for DLOC anywhere from 20-30%). These discounts have allowed families to pass on wealth to the next generation at a minimal estate, gift and generation-skipping transfer tax cost. The discounts have been challenged a plethora of times in court with the taxpayers and the IRS at opposite ends.
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A lot of new businesses and startups are structured as LLCs because they are easy to run, cheap to set up, and flexible. These LLCs are usually taxed as partnerships under the Internal Revenue Code and receive the beneficial flow-through treatment for income tax purposes (not all LLCs are partnerships; some can be S Corporations or C Corporations - see check the box regulations). A lot of times, the owners of these LLCs treat the partnership as if it were the same as their sole proprietorship. That is a big no-no. There are many negative tax and legal consequences of doing this. The LLC should be treated as a separate entity in most instances (there are exceptions to this general rule).
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