By Steven J. Oshins, Esq., AEP (Distinguished)
A large part of estate planning involves using techniques to compress value to transfer assets of larger value to the next generation with minimal taxes.
To do this, estate planners often use family limited liability companies and family limited partnerships to facilitate gifting and installment sales of minority interests or non-voting interests to family members or irrevocable trusts for the benefit of family members.
Under Code Section 2704(b) and Treasury Regulations §25.2704-2(a), if an interest in an entity is transferred to or for the benefit of a member of the transferor’s family, any applicable restriction is disregarded in valuing the transferred interest. Treasury Regulations §25.2704-2(b) defines an applicable restriction as a limitation on the ability to liquidate the entity (in whole or in part) that is more restrictive than the limitations that would apply under the state law generally applicable to the entity in the absence of the restriction.
Nevada Became the #1 State in 2009
Until 2009, all states had been limited to some version of the Uniform Laws. Several states, including Nevada, have had favorable default restrictions that allow for slightly higher valuation discounts than the discounts that can be obtained using other states’ laws.
In 2009, Nevada separated its valuation discount opportunities significantly in comparison to all other states. Specifically, Nevada Senate Bill 350 was signed into law by the Governor on May 29, 2009. One of the provisions of the new law, effective October 1, 2009, allows the creation of a Restricted LLC or a Restricted LP.
The difference between a Restricted LLC and Restricted LP versus a standard LLC and LP is that the Restricted LLC and LP have a default statute locking in the entity’s underlying assets for a ten-year period. This created a new significantly higher ceiling on valuation discounts that is not available in any other state since the current laws look at the state default provisions on liquidation.
No other state has a statute that allows this.
Flexibility of the Restricted LLC/LP Statutes:
Remember that the Nevada Restricted LLC and LP statutes only create a new higher ceiling on valuation discounts that no other state allows. This doesn’t mean that the drafting attorney must lock the underlying assets in for ten years. Maybe five years is more appropriate. Maybe three years.
In certain cases, the operating agreement or partnership agreement might be drafted to lock the underlying assets in for ten years but with the discretionary right to distribute up to ten percent per year. Maybe five percent. Maybe enough to pay any income tax liability. The draftsman can make this determination when creating the documents.
Conclusion:
If you want a larger valuation discount for your client, use Nevada law and use a Restricted LLC or LP. No other state can compete with this.
RELATED EDUCATION
If you found this article interesting, you might also be interested in these other educational programs and products about this topic.
- Planning with SLATs and SLANTs Ahead of TCJA Sunset
- 2024 Year-End Tax Planning
- Planning Now for the 2026 Cliff
ABOUT THE AUTHOR
Steven J. Oshins, Esq., AEP (Distinguished) is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011. He was named one of the 24 “Elite Estate Planning Attorneys” and the “Top Estate Planning Attorney of 2018” by The Wealth Advisor and one of the Top 100 Attorneys in Worth. He is listed in The Best Lawyers in America® which also named him Las Vegas Trusts and Estates/Tax Law Lawyer of the Year in 2012, 2015, 2016, 2018, 2020, 2022 and 2024. He was named the “Estate Planning GOAT (Greatest Of All-Time)” by an internet poll conducted by the Ultimate Estate Planner in March of 2024. He can be reached at 702-341-6000, ext. 2 or soshins@oshins.com. His law firm’s website is www.oshins.com