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Family-owned businesses and estate tax planning

For many generations, families in New Jersey and across the nation have turned to their family business as a means of passing down wealth from one generation to the next. Through careful planning, families can use their businesses as a means of portability, giving children and grandchildren a way to tap into the family's assets without incurring high levels of taxation. This estate tax planning tactic, however, may soon be subject to change if the Internal Revenue Service places limitations on how those assets are valued.

The benefit of creating a family limited partnership or a family-owned limited liability corporation is rooted in the ability to gift a limited-partner interest to one's children or grandchildren. Any assets that are placed within the business remain under control of the parents or owners, but are excluded from their estate. In addition, the value of those assets is appraised lower than other, unencumbered assets, which means a lower tax bill. The reason why a lower value is placed upon the assets is based on the assumption that the limited partners do not directly control the assets, and they are less marketable.

The current IRS rules allow a family-held business to make use of this estate planning tactic as long as the business in question serves a "legitimate business interest." That guideline is lenient enough to allow a family to structure a business for the sole purpose of giving family members a forum in which to make investment decisions for their family-owned securities portfolio. This gives families a powerful means of reducing taxation, while also passing wealth down to future generations.

Recent comments made by IRS officials suggest that changes are on the horizon, specifically in regard to how discounts are applied based on marketability and lack of control granted to limited partners. Should changes limit or eliminate these discounts, many families will need to look for alternative estate tax planning options. For now, however, family-owned limited liability corporations and family limited partnerships offer New Jersey residents a solid means of meeting several different financial goals.

Source: The Wall Street Journal, "IRS Takes Aim at an Estate-Planning Strategy", Liz Moyer, June 26, 2015

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