Family limited liability companies (FLLCs) can help families consolidate their investments, pool liquid assets together as a diversification tool, protect assets and develop long-term estate plans. They can also be useful for educating younger family members about investing.
Before 2011, both family limited partnerships (FLPs) and FLLCs were often used in estate planning for valuation discount purposes. (For the purposes of this article, the discussion of family limited liability companies also applies to family limited partnerships. The use of one structure over another depends on jurisdiction and intended use.) When the lifetime exemption was set at $1 million, they provided a way to gain leverage by allowing families to transfer more than one dollar for every dollar of credit used. Although they are still used for that purpose, the urgency to squeeze more benefit from the exemption amount has abated now that the lifetime exemption is more than $5 million per person.
In this environment, we at Atlantic Trust have found that another use for FLLCs is to create a family investment pool that not only gives younger family members access to investments that they would not otherwise have, but also provides diversification of investment assets, particularly for families with concentrated business wealth.
Because younger family members literally become partners with other family members—including their parents and grandparents—family meetings with relationship managers to review performance and activity in the LLC become business meetings that provide ideal forums for education on investments, economics and financial literacy. With the increased emphasis on enhancing financial fluency, we think this vehicle will gain popularity as a family investment and education tool.
FLLCs are still useful for transferring wealth to younger family members in ways that are tax efficient. If the children or grandchildren own the majority of the LLC as a result of estate planning transfers, most of the income generated flows through them and is taxed at their lower marginal tax rate, while the managing members—the parents—retain control over distributions.
One of the differences between LLCs formed for wealth transfers and those formed for pooling wealth and educating young family members occurs at formation. For wealth transfers, parents typically provide the entire funding and transfer interests in the LLC to the children, giving them a limited equity stake while retaining management control. For investment pools, LLCs are formed by family members who are often in several different generations, all contributing together, taking interests in the LLC and appointing a manager.
In either case, one of the most attractive features of an FLLC is its flexibility. Unlike some estate planning strategies that must be “irrevocable” in order to be effective, the FLLC document can be modified to respond to changes in the family or business structure.
Regardless of the purpose or how the LLC is formed, the entity should be managed as a bona fide business. As a general rule, assets transferred to the FLLC should be invested for growth, and it is important that the FLLC be structured properly. Among the factors that should be considered are the following:
• The FLLC should have a significant business purpose other than to obtain discounts or reduce taxes.
• FLLC accounts should be managed separately from personal accounts and properly documented.
• FLLC assets should not be used for personal expenses.
• The FLLC should have an independent manager.
Due to the complexity of FLLCs, they are not appropriate for every individual or family situation. They involve complexity and ongoing accounting and tax reporting. Also, the documentation for a FLLC must be carefully designed to comply with federal and state laws. However, they are useful tools that can fulfill a number of family wealth planning goals in the proper circumstances.
Linda S. Beerman is Atlantic Trust’s chief fiduciary officer and head of its Wealth Strategies Group. She has more than 30 years of experience in the financial services industry.
