Transferring Family Homes: Family Limited Partnerships, LLCs, and Trusts

An alternative to gifting direct interests in a family home to children or other family members is to transfer the property to a family limited partnership (FLP) or a limited liability company (LLC) and to make gifts of interests in the partnership or LLC to children or other family members. In this Analysis, Nancy G. Henderson discusses the transference of family homes via FLPs, LLCs, and trusts. She writes:

Family Limited Partnerships and LLCs.

     There are numerous potential benefits of transferring family homes into a FLP or LLC. First, because title to the property will be held at the entity level, transfers of interests in the partnership or LLC will not negatively impact upon the chain of title to the property. Correspondingly, because no partner or member will have a direct interest in the property, the property will be protected from liens arising from the debts and liabilities of the various partners or members. Further, the partnership agreement or operating agreement ("entity agreement") can be drafted to address a variety of challenges of co-ownership, such as the use of the property by the partners and the members, the management of the property, and the sharing of the expenses related to ownership of the property. Further, if a partner or member fails to contribute his or her agreed share of the expenses of owning and maintaining the property, the penalties imposed will be easier to implement. Specifically, upon the failure of a partner or member to make a required contribution, the entity agreement can dilute such partner's or member's interest in the partnership or LLC in a manner that is essentially self-executing. The entity agreement can also address the transferability of interests in the partnership or LLC to third parties, it can provide for rights of first refusal and other methods to restrict the transfer of entity interests to non-family members, and it can provide a means for the resolution of disputes between partners or members.

     A question that arises when using FLPs and "FLLC"s in the context of estate planning for family homes is whether discounts for lack of control and lack of marketability will apply for purposes of determining the gift or estate tax value of interests in such an entity. Generally, a limited partnership or LLC can be formed under state law to accomplish any business or investment purpose not otherwise prohibited from operating in that form. Even though real property held by a limited partnership or LLC may be made available for the personal use of its partners or members, such property also has significant investment value. The Tax Court has consistently held that, so long as a partnership or limited liability company is validly formed under state law, and if there is no reason to believe that a hypothetical willing buyer would disregard the partnership, then the partnership form should be respected for gift and estate tax valuation purposes. Therefore, an entity should possess a valid business or investment purpose even if the principal asset of that entity is a family home or other family property.

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