With regard to limited partnerships and how they relate to estate planning, Lets discuss a more sophisticated entity and that is a Limited Liability Company. Which were created out of Europe. A limited liability company is the best of a corporation and partnership put together.
The best attribute of a partnership is a tax neutral, tax flow through so it’s taxed like a sole proprietorship so you don’t have a separate tax structure – just file a K-1 form and all the assets and income go to the individual.
Liability is a common worry, when you have a partnership you are exposed to unlimited liability when you are a sole proprietorship, you have 100 % liability. When you are in a partnership, you are liable for acts of your partners so you partners can make deals and sign contracts and you are also liable for their acts. So we create an entity like the limited partnership. You have limited partners who are not liable except for the extent of their contributions.
The general partner accepts liability, now when a limited liability company takes the best attributes of Corporations and partnerships and merges them together – you have now a Manager. The manager has complete control and manages on behalf of the LLC. Usually the members are merely limited partners which are investors. With this plan, the IRS doesn’t know how to treat these issues, there are many new rulings.
Now old limits are up to about 75 for S type Corporations- which are flow through type corporations. The Manager of the Limited Liability Company has complete control. The limited partners can be children or the Living Trust. So the characteristics of a Limited Liability Corporation are as follows:
- The continuity of life: there used to have been a designation of life and period upon Limited Partnerships and you have the complete limited liability.
- The LLC can file bankruptcy.
- The LLC’s are very good- they can hold Investments and Business Assets.
- LLC’s are very common; people are very comfortable and more accepted.
- Most states have LLC statuses for which are good for Real Estate and Liquid Assets, and are also good as an Asset Protection Entity.
There can also be lawsuits against individuals in the LLC. A creditor can make a charge against an individual which means they are charging against the income, they will try to step in and take part of the income distribution- No distributions can be done. The tax flows through to the judgment creditor on the form K-1. This can flow to the creditor that will be stuck with a tax liability but no income- no asset to pay the liability. Similar situations can be done with trusts with sprinkling powers. The right to income is contingent upon the trustees choosing upon a distribution. So now we have achieved the estate planning, planning objective, asset protection and everything goes into the LLC entity.
