An Estate Planning Disaster AvertedAn Estate Planning Disaster Averted
Last month we discussed the benefits of limited partnerships and limited liability companies as estate planning tools. This month we will look at the recent Hackl case, which struck terror in the hearts of estate planning professionals and their customers because of the way it could affect those planning tools. The court seemed to be striking at a key feature of these plans, saying that the gift tax
Roy M. Adams
Last month we discussed the benefits of limited partnerships and limited liability companies as estate planning tools. This month we will look at the recent Hackl case, which struck terror in the hearts of estate planning professionals and their customers because of the way it could affect those planning tools. The court seemed to be striking at a key feature of these plans, saying that the gift tax exclusion (now $11,000 per person) would not apply to gifts of partnership units or LLC interests under certain circumstances.
The issue here for brokers is whether this case spells the end of family limited partnerships or limited liability companies. If so, brokers could lose a nice source of revenue when they act as trader or investment advisor to the partnership or limited liability company. Without the ability to pass on those shares tax-free, fewer clients — perhaps none — would create FLPs and LLCs. After all, one idea behind a family limited partnership or limited liability company is to give away units or interests (not the assets) without incurring gift tax and estate tax — even though the creators of the trust can select their broker as trader or advisor and control investments and distributions in the family limited partnership or the limited liability company. The family's investments are the same, but control varies slightly. The broker, advisor or trader is the same, but significant tax is saved.
Fortunately, the Hackl case (which involved numerous gifts of partnership shares made by Albert and Christine Hackl) does not clearly make the case for the end of family limited partnerships and limited liability companies. Indeed, advisors and trust attorneys can easily avoid raising the objections that the IRS had with how the Hackls carried out their giving program. The Hackls placed in their LLC securities and shares in two tree farms. The IRS's problem was the lack of “present interest” that the beneficiaries had in the shares. In other words, because the beneficiaries were limited in their ability to control or sell their shares, they did not qualify for the gift-tax exclusion. Listen to a critical sentence in the ruling:
The Court noted that a member (beneficiary of the trust who received notice) … could not sell their interests without the consent of the Manager whose consent may be given or withheld, conditioned or delayed, as the Manager may determine in the Manager's sole discretion.
In addition, the court also found that any income generated would only be distributed at the manager's discretion as further support for the proposition that the donees did not have the immediate use, possession or enjoyment of the transferred property (in other words, a “present interest”).
Even if Hackl is not overturned, estate planning professionals should be able to avoid the Hackl result by giving the donees (holders of the limited liability company interests or partnership units) the unilateral right to sell their interests to third parties, subject to a right of first refusal by the entity or other equity holders to purchase the interests at the offering price. This is the practice in most limited liability companies and family limited partnerships anyway, so little change is expected to avoid the Hackl result, which could have been devastating to these techniques of limited liability companies or family limited partnerships as it was to the taxpayers in the Hackl case.
One more disaster is thereby avoided. And a mechanism for gift giving that many readers of this column may be involved in is preserved. If you aren't familiar with these devices — and you are hoping to serve high-net-worth clients — it is worth your while to learn about them. Usually, in estates under $5 million, the use of limited liability companies and family limited partnerships is, in my experience, no less than roughly 50 percent. In estates substantially over $5 million, use exceeds 80 percent. No “heart attacks” are in order, then, for your customers who plan accordingly and look to you for counsel, advice and professional services in trading or running money within limited liability companies or family limited partnerships.
Writer's BIO:
Roy M. Adams is a partner in Sonnenschein Nath & Rosenthal in New York, and chairman of the editorial advisory board of Trusts & Estates.
