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The Spring 1999 Estate Planning Advisory outlined the advantages of Family LLCs as a means of centralizing the management of real property while also allowing for the ownership of the property to be disbursed among family members. While that remains one of the primary uses, family LLCs can also be used to manage many other types of assets, including marketable securities. Outlined below are the key attributes of family LLCs that can enable them to play an important role in an estate freeze plan.

Ownership.
Ownership of an LLC is represented in fractional shares or units. As a result, the person who creates an LLC can transfer small fractional interests in the LLC to multiple beneficiaries or to a few beneficiaries gradually over time.

Control.
Control of an LLC’s affairs is in the hands of its managers. Thus, while many people (i.e., members) may own an economic interest in an LLC, only the managers (who may or may not have a large ownership interest) are in control.

Restrictions on Transferability.
LLC operating agreements can be drafted to include stringent restrictions on who can become LLC members. For example, membership can be limited to children and other descendants of the original creator of the LLC. Typically, members who want to sell their LLC interests can be required to first offer to sell their interest back to the LLC (often at a discounted value) or to the other LLC members.

Valuation Discounts.
Small, non-controlling interests in an LLC need not be valued in direct mathematical proportion to their percentage interest in the LLC for gift or estate tax purposes. Additional valuation discounts can also be claimed if there are significant restrictions on transferability. Because of these valuation discounts, the economic value of the LLC-owned property can be transferred to family members at a reduced gift and estate tax cost.

Future Appreciation in Value.
To the extent the assets owned by the LLC increase in value, each members interest in the LLC will increase in value proportionately. Thus, if the creator of an LLC also is the man-ager of the LLC, he or she can transfer most of the ownership interests in the LLC to others, along with the opportunity to share in future appreciation in value, while still retaining control over the management of the LLC. Notably, income generated by LLC assets is usually distributed in mathematical proportion to LLC ownership interest. Thus, future increases in income from LLC assets can also be shifted to others.

Because of the enormous tax advantages available through the use of the family LLC, it is important that the arrangement be structured very carefully. As part of the planning, it is highly recommended that you obtain a professional appraisal to substantiate the underlying value of the property being transferred and the amount of the discount claimed.