¶ 5001
Overview
Scope of the chapter. The limited liability company has become the principal entity through which families hold investment assets, operating businesses, real estate and interests in other entities for the long term. An LLC formed for these purposes is commonly called a family LLC. It serves several ends at once: it places assets under centralized management, permits the senior generation to transfer economic interests to children and trusts in fractions without fragmenting control of the assets, supplies the transfer restrictions and creditor protections examined in earlier chapters, and provides a mechanism for the succession of management from one generation to the next. This chapter examines the family LLC as an instrument of estate and succession planning. It considers the federal transfer tax framework within which the planning takes place, the valuation of LLC interests for gift and estate tax purposes, the special valuation rules of chapter 14 of the Internal Revenue Code, the principal ground on which the Internal Revenue Service attacks family entities (section 2036), the income tax consequences of lifetime and testamentary transfers, the use of LLC interests in sales to grantor trusts and in grantor retained annuity trusts, and the provisions of the operating agreement that govern the succession of management and the place of trusts, spouses and heirs.
Relation to other chapters. Several subjects that bear on estate planning are treated elsewhere and are cross-referenced here without repetition. Transfers of interests, the rights of transferees and the admission of trusts and heirs as members are treated in Chapter 29. Buy-sell agreements, the valuation rule of section 2703 and the Supreme Court's decision in Connelly v. United States on life insurance funding of redemption obligations are treated in Chapter 30 (¶ 3050, ¶ 3060). The consequences of a member's death, incapacity and dissociation under the LLC statutes are treated in Chapter 31, and the death of the sole member of a single-member LLC in Chapter 9 (¶ 980). The transfer tax valuation of interests in a single-member LLC and the change in its tax classification when interests are given away are treated in Chapter 42 (¶ 4270). The partnership tax rules on contributions, distributions and the section 754 election are treated in Chapters 40 and 41. The protection of family assets from creditors, including the use of LLCs with domestic and foreign asset protection trusts, is treated in Chapter 55; the companion volume, Lighthouse on Asset Protection, treats the trust-based planning in full.
Why the LLC. Until the mid-1990s the family limited partnership was the standard vehicle for family wealth planning, and much of the case law under sections 2036 and 2703 arose from limited partnerships. The LLC has displaced the limited partnership in much of this planning for three reasons. First, every member of an LLC has the protection of the liability shield, while a limited partnership requires a general partner with unlimited liability or a corporate or LLC general partner that adds an entity to the structure. Second, the LLC statutes permit the operating agreement to allocate management, economic rights and transfer restrictions with the same freedom that the limited partnership statutes allow, and in the leading states with greater freedom (Chapter 3). Third, a single-member LLC can be formed first and converted into a multi-member LLC by gifts or sales, without the formation of a new entity (¶ 4270). The cases decided under the partnership form apply to LLCs with the same force, because the federal transfer tax provisions at issue (sections 2036, 2038, 2503(b), 2512 and chapter 14) apply to interests in partnerships and to interests in LLCs classified as partnerships in the same way. Section 2704 by its terms applies to corporations and partnerships, and an LLC classified as a partnership for income tax purposes is treated as a partnership for this purpose (¶ 5050.05).
Organization. ¶ 5010 describes the purposes and the structure of a family LLC. ¶ 5020 states the transfer tax framework as it stands after the amendments made in 2025. ¶ 5030 treats the annual exclusion for gifts of LLC interests. ¶ 5040 treats valuation discounts and defined value transfers. ¶ 5050 treats sections 2701, 2703 and 2704. ¶ 5060 treats section 2036 and the cases applying it to family entities. ¶ 5070 states the operating practices that the cases reward. ¶ 5080 treats income tax basis and the principal transfer techniques. ¶ 5090 treats management succession, trusts as members, family law issues and state death taxes, and closes with a checklist.