Apr 1, 2010 12:00 PM

Consider their impact on family limited partnerships versus family limited liability companies

By John M. Janiga & Louis S. Harrison

Estate planners often must make a decision whether to recommend a family limited partnership (FLP) or family limited liability company (FLLC) to achieve the best federal estate tax savings for a client.¹ While many considerations impact the choice of an FLP versus an FLLC,² one factor that probably escapes consideration by many practitioners is the impact of the passive activity loss (PAL) rules for federal income tax purposes on that choice.

As part of the decision whether to suggest an FLP or FLLC, it's necessary to determine if the entity is comprised of an operating business that may generate losses and if so, whether such losses will be deductible under the PAL rules. A limited partner in an FLP is unlikely to establish material participation in the activities of the entity under the restrictive tests applicable to limited partners; consequently, the losses of the operating business held by an FLP may not be deductible currently or, perhaps, ever. However, based on two recent cases, a membership interest in an FLLC is subject to the more expansive tests applicable to general partners. Thus, it may be possible to structure an FLLC in such a way that a member's interest is subject to estate tax discounts, while avoiding application of the PAL rules.

Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
2010 Tax Act News	Industry Trends Surveys

E-Newsletter Signup

Poll

Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
2010 Tax Act News	Industry Trends Surveys

E-Newsletter Signup

2011 Trust Glossary

Click here to download the 2011 Trust Glossary

50 Years Ago This Month

Click here to read the issue.

50 years ago, in May 1962, we featured articles such as: "Future of Canadian Trusteeship" by Arthur H. Mingay", "Training Trust Employees" by Ian M. Marr, "What is a Trust Officer?" by Eric J. Brown, and "Selling Services" by Donald I. Webb.

Conrad Teitell's Guide to Tax Benefits For Charitable Gifts

Click here to view the most up to date guide (September 2011)

Press Releases