Privately and closely held businesses are often the primary assets in a family’s financial portfolio. To help individuals and families manage these assets more effectively and preserve value for future generations, clients need effective legal counsel that understands the unique financial and personal dynamics that influence business decisions.
The experienced private wealth management lawyers at Troutman Sanders serve as family advisors for many aspects of a client’s business. We routinely form limited liability companies for clients to handle their real estate holdings, provide advice regarding passing a business to appropriate successors, and work with our corporate lawyers to prepare businesses for liquidation events such as sales or mergers. Business Succession Planning
Entrepreneurs often fail to consider wealth transfer taxes during the early stages of a new business. However, by recognizing the longer-term implications of these taxes for their families and enterprises, owners of emerging businesses can engage in effective estate planning that maximizes financial opportunities. With combined federal and state wealth transfer tax rates as high as 50 percent in some states, these transfer taxes may, someday, cost a business owner’s descendants millions of dollars in taxes that might have been avoided through careful, early planning — the earlier, the better.
We also work with clients to help them organize their business holdings such that they may qualify for favorable deferral of estate taxes, pursuant to specific legislative relief that may be available to owners of illiquid small businesses.
We assist business owners with non-tax concerns with respect to their business holdings, such as structuring holdings for liability limitation purposes, to involve the next generation in the business, or manage the many moving parts of multi-layered business entities.
Family Limited Partnerships
Historically, family investments have been held in limited partnerships, general partnerships or corporations. While circumstances may call for creation of these entities, limited liability companies (LLCs) have become more popular because of their relative simplicity, flexibility and reduced liability. However, we provide legal support and practical legal advice for management of all family entities, regardless of their form. Limited Liability Companies
For many clients, LLCs provide limited liability to protect their estates from creditors related to a single property or enterprise as well as an attractive means of allowing family members to participate in family investments (including access to investment vehicles otherwise unavailable at lower asset levels). If an LLC meets a family’s other objectives, substantial tax savings can be a significant byproduct of LLC planning. An LLC is in many ways similar to a partnership, but unlike a partnership no person has individual liability for LLC debts. All LLC income and deductions “flow through” to its members for income tax purposes.
Other tax advantages clients may realize through the use of family LLCs derive from the minority interest discount and the lack of marketability discount applicable to LLC interests. The minority interest discount adjusts the value of the transferred LLC interest to reflect factors such as the lack of control and voting power. The lack of marketability discount adjusts the value of the transferred LLC interest to reflect a narrower-than-usual range of prospective purchasers. For those discounts to be applicable for transfer tax purposes, the LLC must have a business purpose.
Properly drafted transfers of LLC interests to younger-generation family members can qualify the gifts for the gift tax annual exclusion. A client may also make tax-free transfers of LLC interests (in excess of the annual exclusion amount) by using all or part of his or her lifetime gift exemption, usually to trusts for the younger generation.