 |
| 1.
Reasons to Use FLPs and FLLCs for Estate Planning. |
| a.
Better Management. Often an older generation will organize
a variety of assets in an FLP or FLLC. These assets may include
real estate, partnership interests, and security investments.
Organizing these assets in one business entity, which has a
designated manager in the form of general partner or manager,
often allows for increased management efficiency. |
| b.
Retention of Control. Often an older generation will form
an FLP or FLLC and then gift fractional interests, in the form
of percentage partnership or FLLC interests, to children and
grandchildren. The older generation can retain control of the
management and investment of the entity's properties by being
the general partners or managing members of the entity. |
| c.
Valuation Discount. When FLP or FLLC interests are transferred
by gift or at death, appraisers generally conclude that the
value of the assets should be significantly discounted. Depending
on the entity, state law, and the type of assets held, these
appraised discounts may be in the 25% - 60% range. This reduction
in value is called "valuation discount," and generally produces
significant transfer tax savings. |
| d.
Creditor Protection. Under state law, a creditor of a partner
in an FLP or member in an FLLC is generally limited to obtaining
a "charging order" against the partner's or member's interest
in the entity. A creditor is not allowed to reach the assets
in the entity, or ownership of the partnership or the FLLC interest
itself. The creditor must wait until distributions are made
to the partner or member, and at that point the creditor may
reach such distributions. Often, the decision-making power concerning
whether to make such distributions is in another person: the
general partner or manager of the entity. Thus, an FLP or FLLC
interest is often not a productive asset for a creditor to pursue. |
| 2.
Alaska Law Changes to Support Valuation Discount. A number
of states have changed their limited partnership and limited
liability company laws so as to provide the best support for
the position that when these interests are transferred they
qualify for valuation discount. The default rules in Alaska
are that these entities have a perpetual existence, which can
only be terminated by the agreement of all partners or members.
Dissolution of the entity can not be forced by the actions of
a single partner or member. When Alaska amended its limited
partnership law to accomplish these tax goals, it also enacted
similar amendments to its limited liability company law. Therefore,
the default rules for both types of entities provides strong
arguments in support of valuation discount of their interests. |
| 3.
Creditor Protection. Alaska limited partnerships and limited
liability companies perhaps provide the strongest creditor protection
of any existing state law. Judicial dissolution of such entities
can only occur if it is "impossible" to continue the entity's
business activities. In addition, the Alaska 2000 legislature
enacted amendments that clarified that a charging order is the
sole remedy for creditors of partners and LLC members. To understand
this amendment, the following background is necessary. Generally,
limited partnership and limited liability company statutes do
not expressly permit creditor remedies other than a charging
order . This is consistent with the concept that the other partners
of a partnership or members of a limited liability company should
not have their business or investment activity disrupted by
being forced to take in a substitute partner or member (e.g.,
the judgment creditor). This was the generally understood position
taken by the Uniform Limited Partnership Act and many limited
liability acts. |
| However,
in Madison Hills Ltd. v. Madison Hills, Inc., a Connecticut
court held that a judgment creditor of a limited partnership
could foreclose on a partnership interest. The Connecticut court's
holding opened the door for courts to provide a variety of remedies
to creditors of partners in limited partnerships and members
in LLCs. These additional remedies could result in forced dissolutions
of the entities and the sale of their assets. The Alaska Legislature
concluded that such results could be very harmful to the other
partners or members, their families, and their business interests. |
| The
newly enacted Alaska amendments make it clear that a judgment
creditor of an Alaska limited partnership or limited liability
company has only the remedy of a charging order. Thus, the creditor
will receive all distributions made to the debtor partner or
member. But, the right to receive such distributions is the
judgment creditor's sole remedy. No other state law remedies
are available to the judgment creditor or to a court implementing
a creditor's collection request. However, a creditor may have
additional remedies under federal bankruptcy law. |
| The
strengthened creditor protection provided to these entities
should make them even more popular for estate planning purposes.
While many families are attracted to these entities for gift
and estate tax reduction, creditor protection may prove to be
an equally advantageous reason for their use. |
| Our
Office is available to discuss with you the use of family limited
partnerships and family limited liability companies in your
estate planning. |
