Closely held business interests raise valuation, control, and liquidity problems at once. Family limited partnerships (FLPs) and LLCs consolidate assets, facilitate gifting of discounted interests, and centralize management; buy-sell agreements govern transfer on death, disability, or departure. Recent developments in valuation-discount scrutiny and beneficial-ownership reporting reshaped the compliance landscape.
- Contribute assets to the entity; gift or sell nonvoting/limited interests to trusts (often IDGTs) while retaining management control.
- Minority-interest and lack-of-marketability discounts can materially reduce the transfer-tax value of gifted interests, provided the entity has a genuine nontax business purpose and formalities are respected.
- The IRC 2704 attack: proposed regulations to curb discounts were withdrawn in 2017, but respect economic substance — the IRS still challenges FLPs under 2036 where the donor retains too much enjoyment or control.
IRC 2036 is the real risk
Deathbed FLPs, commingling, disproportionate distributions, and using entity assets for personal expenses invite full estate inclusion under 2036(a). Fund well before death, keep the donor solvent outside the entity, observe formalities, and document business purpose.
- Structure as redemption, cross-purchase, or hybrid; fund with life insurance and set a defensible valuation method (formula, appraisal, or agreed value updated regularly).
- For estate-tax value-fixing, meet the IRC 2703 requirements (bona fide business arrangement, not a device to transfer to family for less than full value, comparable to arm's-length terms).
- Note Connelly v. United States (2024): corporate-owned life insurance funding a redemption increases the company's value for estate-tax purposes and is not offset by the redemption obligation — reconsider entity-redemption structures and favor cross-purchase or specially designed arrangements.
Key takeaways
- FLPs/LLCs enable discounted gifting and centralized control — but only with genuine business purpose and strict formalities to avoid IRC 2036 inclusion.
- Buy-sells must meet IRC 2703 to fix value; after Connelly, rethink insurance-funded corporate redemptions.
- As of the 2025 FinCEN interim rule, U.S.-formed entities are exempt from federal BOI reporting; only foreign reporting companies report. Verify current status.
Authorities
- IRC 2036, 2703, 2704; Estate of Powell, 148 T.C. 392 (2017)
- Connelly v. United States, 602 U.S. 257 (2024)
- FinCEN interim final rule (eff. Mar. 26, 2025), 90 Fed. Reg. 13688 — Domestic entities exempt from BOI.