Teaching Your Children About Wealth

Families are using limited liability companies to transfer assets between generations.

By Liz Moyer

Do you need a family limited liability company, like Bill Gates? Reuters family investment, Image of Bill Gates

Wealthy families are increasingly turning to family limited liability companies to minimize taxes and transfer assets between generations.

The strategy helps provide hands-on investment education for the younger generation without forcing older family members to cede control and offers other benefits.

Advisers to high-net-worth families say the LLC arrangement is gaining popularity as older generations in North America prepare to transfer an estimated $30 trillion in assets to heirs in the coming decades, according to the consulting firm Accenture.

The growing interest among the wealthy in education and financial literacy since the financial crisis has made LLCs more popular, says Linda Beerman, head of wealth strategies at Atlantic Trust, Canadian Imperial Bank of Commerce’s CM -2.13% U.S. wealth-management arm, which has $24 billion under management and manages family LLCs for some of its clients.

Typically, an older-generation member—who acts as the managing partner—forms an LLC to create a family investment pool using assets such as commercial property, vacant land, a family business or an investment portfolio. The managing partner can make gifts of limited-partnership interests directly to other family members, such as children and grandchildren, or to their trusts. In some cases, family members can buy shares in the LLC.
The managing partner retains control of the assets, but the limited partners get to observe how investment decisions are made and, in some cases, help establish the investment mission.

The assets inside the LLC are protected from creditors, including divorcing spouses, which has made them popular with families that own their own businesses, lawyers said.

“It’s seen by the kids as graduating into the family,” Ms. Beerman says. “It gives them a sense of ownership.”

The booming markets of the past few years have made them popular for another reason, experts say. Because the limited shares in an LLC are minority interests, the value of the assets that are transferred into the LLC can be discounted from their fair-market value for tax purposes.

Such discounts typically range from 15% to 25%, and can go as high as 30%. For example, consider an asset with a $1 million fair-market value. Inside an LLC, that asset would be less valuable because multiple owners have minority stakes but no control. If it was valued at 25% below its fair-market value, its taxable value would be $750,000.

Rising markets have motivated families to lock in those lower valuations, says Richard Baum, a partner at accounting firm Anchin Block & Anchin in New York. That way, he says, “you can pass wealth to the next generation using the lowest possible value.”

One famous example of a family LLC is Bill Gates’s Cascade Investment LLC, which is based in Kirkland, Wash., and manages a portion of the Gates family money.

There are some drawbacks, estate lawyers and advisers say. To avoid scrutiny by the Internal Revenue Service, a family LLC needs to serve a legitimate business purpose.

That can include managing commercial property or a family’s investment portfolio, but not other holdings, such as a vacation home that is used by the family. The LLC interest holders must meet regularly, maintain current state filings and keep detailed records of income, expenses, contributions and distributions.

Families can use an LLC to buy and hold stakes in exclusive investments such as timberland or private-equity funds. Conversely, a family with its own business can set up an LLC to diversify its investments. The LLC also could be set up to forbid family members from selling their stakes unless everyone agrees or require a certain percentage of shareholders to agree to investment decisions.

In some cases, families are setting up these companies to pool their assets so they can qualify for the most exclusive private-banking services at firms such as J.P. Morgan Chase, JPM -0.27% Goldman Sachs Group GS -0.58% and UBS, UBS -0.54% says Jonathan Forster, a lawyer at Greenberg Traurig in McLean, Va., who has set up family limited liability companies for clients with at least $30 million of assets.

“People are using these structures more because they are using more sophisticated investments,” Mr. Forster says. “They’re not just buying stocks and bonds. They’re buying commercial real estate or private company stakes.”
Source: The Wall Street Journal – wsj.com Write to Liz Moyer at liz.moyer@wsj.com

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning. She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about. Annino recently released her new book, “It’s More Than Money, Protect Your Legacy” available at Amazon.com. To download Annino’s FREE eBook, Estate Planning 101 visit, http://www.patriciaannino.com.

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