A U.S. District Court ruled that gifts of memberships in an LLC did not qualify for the annual gift tax exclusion as they were grants of future interests. In the case, a married couple put land in a Limited Liability Company and subsequently granted a 5% interest apiece, to their children. The terms of the operating agreement gave the parents essentially full control of the operation up until the point of their death.
The underlying assets were of no use to the children until a future time, thus making the grant of the membership interests a future interest. The District court ruled that such interest only granted the children a benefit in the future and was most certainly not within the scope of the annual gift exclusions current interest requirement.
Once again, taxpayers lost when they tried to bend the laws too far in their favor. Utilizing an LLC or Limited Partnership for family tax planning has its place. There are legitimate uses and then there is tax avoidance such as occurred in the present case. When using these instruments, pay attention to what is going where and what the fair market values are, and whether the transaction makes sense from a business perspective.
By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors