Retired? How you can use a LLC and FLP in your Estate Plan

March 1, 2012 by Bart Chepenik

Florida is famous for its unique attributes. The state is known for having plenty of sunshine, ocean breezes and its “snowbirds”, or its senior citizen residents who return to Florida every winter to take advantage of all the Sunshine State has to offer. Florida has retained the highest percentage of senior residents in the country, with 17.3 percent of citizens older than age 65 in 2010. From 1990 to 2000, Palm Beach County's 65-plus population grew 25 percent while Broward County saw a 1.4 percent increase in its senior population. Miami-Dade County saw a 17 percent increase in 65-and-older residents in the past 10 years. And while some Broward and Palm Beach cities now have fewer senior residents than before, many still retain vibrant retirement communities, which boost their 65-plus-population percentage high above the 13 percent national average. In Tamarac, where 38 percent of the population was 65 or older in 2000, seniors continued to make up 28 percent of the population in 2010. In Palm Beach County, seniors made up well over 50 percent of the population in the small communities of Briny Breezes, South Palm Beach and Highland Beach.

Senior citizens have their own unique needs when it comes to financial planning and protection of assets. Every senior should aim to utilize the variety of planning devices are available that will allow them to save taxes and protect assets. These devices include trusts, family limited partnerships (FLPs), and limited liability companies (LLCs).

Some concerns senior citizens have are the same concerns as the general population. For example, they, like others, want to save on taxes. They want to pay the IRS the least amount of federal income tax possible. If they decide to give gifts, they want to minimize the transfer taxes involved. The elderly, like others, want to protect their assets from creditors. If they are involved in a business, they may want to shield themselves from the effects of judgments against the business.

However, some concerns are unique to seniors. For example some elderly individuals may face nursing home care and may worry how their Medicaid eligibility will be affected. The elderly may also be concerned about the probate process and may want to control the process to reduce the cost and publicity involved.

Recently, family limited partnerships (FLPs) and limited liability corporations (LLCs) have emerged as financial planning techniques people can use to protect assets from creditors, save taxes, and maintain control over their affairs. Family Limited Partnerships (commonly called FLPs) can facilitate moving wealth from one generation to another. Partners of an FLP are either General Partners (GP) or Limited Partners (LP). General Partners have the responsibility for managing the FLP and its assets. Limited Partners generally have just an economic interest in the FLP. Limited Partners have no ability to control, direct, or otherwise influence the operations of the FLP. They can neither buy additional assets, nor sell existing assets, and they cannot act on the Partnership's behalf. So why would setting up an FLP ever benefit a senior citizen who wishes to transfer money to a family member? First, FLPs allow one family member, typically the GP, to move assets to other family members (often children who are LPs), while still retaining control over the assets. Because the LPs have no rights of control, they cannot liquidate their partnership interest. The General Partner decides the timing and amounts of distributions. That is, a distribution cannot be made to one partner (GP or LP) unless all partners receive their pro rata portion of any disbursements. Secondly, when calculating the fair market value of a transfer for tax purposes, the transferred money is typically valued less than if the money transfer had been in cash. The interest in a FLP is not liquid and therefore the interest holder may not receive a distribution until sometime in the near (or distant) future. Thus, the fair market value for transfer tax purposes is usually less than the interest transferred.

A second tool for protecting assets is a hybrid business entity having certain characteristics of both a corporation and a partnership. This is called a LLC or a limited liability company. The primary characteristic a LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation. A LLC often is more flexible than a corporation, and it is well suited for companies with a single owner.

LLCs can offer senior citizens substantial protection of their assets from creditors. It does this in several ways. One way a LLC protects a person’s assets is through the charging order mechanism. The charging order limits the creditor of a debtor-member to the debtor’s share of distributions, without conferring on the creditor any voting or management rights. Secondly, a member is (generally) liable only to the extent of his or her contribution for any LLC debt. Thirdly, LLCs are not subject to the double taxation of corporations because several IRS rulings have determined the LLC should be taxed as a partnership. Finally, LLCs seem to offer more control than trusts.

However, the main disadvantage of utilizing a LLC is the interest in a LLC is not readily transferable. This is not a problem if an elderly person never wants to transfer their interest in the LLC. However, if they do want to transfer it, they can, as in a partnership, only transfer their right to share in the profits and not any of the other rights of membership such as the right to participate in the management of the LLC.

Senior citizens should seek out the advice of an experienced attorney when deciding which tools for asset protection they want to use. It is important the attorney understand each individual’s unique needs and unique concerns. If you or someone you know lives in the West Palm, Fort Lauderdale, or Miami-Dade area the experienced attorneys at Chepenik Trushin will help with these estate planning needs. Please feel free to contact us at (305) 981-8889 for an initial consultation.

References:

Census shows fewer seniors in some South Florida cities, November 30, 2011, By Diane C. Lade and Dana Williams, Sun Sentinel

Elder Law Journal, Spring, 1995, Family Limited Partnerships, Trusts, or Limited Liability Corporations: Which Should the Elderly Choose?, Timothy R. Baumann Copyright (c) 1995 by the Board of Trustees of the University of Illinois; Timothy R. Baumann