Creating an FLLC involves legal fees, filing costs and ongoing maintenance expenses. These costs are usually reasonable when considering the tax benefits. However, as a result of changing tax rules, the estate and gift tax benefits of FLLCs have become unnecessary for many families over the past few years. Valuation discounts for minority interests and lack of marketability are typically allowed for gifts of membership interests in an FLLC. However, these discounts may be challenged by the IRS, and the FLLC assets may be deemed to be included in the donor’s taxable estate.
Often, the non-tax benefits of FLLCs still make this tool an attractive choice.
TrustCounsel’s estate planning lawyers review a few of the non-tax benefits of Family Limited Liability Companies below:
- Third party claim protection. If family members are involved in a lawsuit and are subject to a judgment or other third party claim, the family business assets included in an FLLC remain unaffected. This benefit alone may ensure the longevity of a business that could be crippled by an unforeseen lawsuit against one of the owners.
- Family member protection from business claims. Just as business assets are protected from personal claims, personal assets of family members are protected from claims made against the business.
- Business interruption protection. In the event a family member becomes incapacitated, a well-drafted FLLC operating agreement provides a plan so that business management will continue.
- Dispute resolution. If a dispute arises between family members with business interests in the FLLC, a provision for dispute resolution can offer a process for conflicts to be managed. This may involve arbitration or other out-of-court method to reduce expenses for resolving the dispute.
- Asset protection in divorce. FLLCs can also insulate assets from spousal ownership claims so that in the event of divorce, family business assets will be recognized as separate property.
Review different business ownership options with an asset protection and tax attorney. Family businesses face unique challenges and a lawyer can provide invaluable advice when it comes time to decide how family business assets are to be managed. Business succession plans are an important part of this process.