Valuation of FLPs and LLCs

Family limited partnerships are a means for the consolidation and protection of family assets for future generations. FLPs enable the original owners of these assets to manage and control these assets, while reducing the gift and estate tax costs involved in the transfer of assets to family members. In recent years, LLCs have emerged as an appropriate family estate planning alternative to FLPs in certain circumstances. These entities can contain a diverse array of assets, including stock in privately owned businesses, public company stock, and real estate. When making a gift, or upon the death of one of the partners (FLP) or owners (LLC), the assets in the FLP or LLC must be valued by a professional appraiser.

Discounting the Value of FLP and LLC shares

For gift and estate tax purposes, the value of an FLP or LLC interest is based on fair market value, i.e., the price a willing buyer would pay a willing seller. Because of the restrictions on the ability of the limited partners to control the assets and the lack of marketability of the FLP or LLC interest, the valuation of a FLP or LLC interest is discounted from the sum of the fair market values of the underlying FLP assets. The size of the discount depends on the nature of the FLP or LLC agreement and its assets, the size of the interest being valued, and applicable state law.