Time for a New Plan: The LLC Is a Better Option for Estate Planning After Cannon v. Bertrand
| Author | Jonathan J. Rose |
| Pages | 1029-1052 |
Time for a New Plan: The LLC Is a Better Option for
Estate Planning After Cannon v. Bertrand
I. INTRODUCTION
As the old saying goes, the only two things certain in life are
death and taxes. But individuals can never be certain about the tax
consequences that accompany death. The desire to reduce tax
liability upon death and subsequently increase the value of assets
transferred to surviving family members leads many people to
actively manage their estates. Active management reduces the
uncertainty associated with the taxes levied on a decedent‘s estate.
There are several useful methods available to reduce estate tax
liability, including the family limited partnership. Individuals
transfer assets to the family limited partnership in exchange for
interest in the partnership.
1
The value, and resulting tax liability,
for the partnership interest is generally lower than the aggregate
value of the assets valued separately because the IRS permits the
application of discounts to business interests to reflect lack of
control, illiquidity, and lack of marketability.
2
Maximizing the
amount of discounts applied to assets in the estate is a major goal
of estate plans.
3
Although death and taxes are certainties, discounts
can be used to decrease the tax consequences of death.
The value of these partnership interests is largely dependant on
the rights held by the owner under state law.
4
Louisiana
partnership law states that a partner ceases to be a member of the
partnership at death, and at death, the partner‘s successors are
entitled to the value of his former share.
5
State courts have
determined the appropriate method for assigning value to the
shares. Prior to the recent Louisiana Supreme Court decision in
Cannon v. Bertrand,
6
the court determined that fair market value
Copyright 2011, by JONATHAN J. ROSE.
1
. Russell Standaland, Note, Valuation Discou nts After Estate of Nowell v.
Commissioner: A Clear Formula for Reducing Estate Taxes, 30 GOLDEN GATE
U. L. REV. 679, 684–85 (2000).
2
. LOUIS A. MEZZULLO, BNA TAX & ACCOUNTING CTR., PORTFOLIO 722-
3RD: FAMILY LIMITED PARTNERSHIPS AND LIMITED LIABILITY COMPANIES pt.
I.C (2011).
3
. Id.
4
. See discussion infra Part IV.A.
5
. LA. CIV. CODE ANN. art. 2823 (2005).
6
. 2 So. 3d 393 (La. 2009).
1030 LOUISIANA LAW REVIEW [Vol. 71
was the proper valuation method.
7
Under this method, family
estate plans were still able to utilize the partnership as a means of
achieving value-reducing discounts. The Cannon court, however,
deviated from the manner in which partnerships were valued in
prior partnership valuation cases.
8
The type of valuation used by
the court in Cannon increases the potential judicial award for the
interest of a withdrawing partner.
9
This decision is also likely to
increase the value of a deceased partner‘s former interest for estate
tax purposes.
10
The potential increase in value of partnership
interests makes the family limited partnership a less attractive
option for estate planning.
11
The limited liability company (LLC) is a more effective estate
tax planning tool post-Cannon.
12
Although the extent to which
Cannon will affect future partnership valuation is uncertain, the
probable result is a higher valuation placed on partnership
interests.
13
However, the law on LLC interest valuation after death
is different from the law for standard partnerships.
14
This
difference makes the Cannon decision inapplicable to LLC
valuation upon death, meaning Louisiana LLC interests will still be
eligible for the valuation discounts that are desirable in estate
planning. The uncertainty surrounding partnership valuation post-
Cannon can be avoided through the use of LLCs in estate planning.
Part I of this Note discusses relevant partnership withdrawal
law and the judicially crafted valuation method that existed prior to
the Cannon decision, as well as relevant estate tax law. Part II
presents and analyzes the Cannon decision. Part III explains the
effects of state law on estate tax and examines the effects of
Cannon on the valuation of partnership interests for estate tax
purposes. Part IV discusses the family limited partnership and
presents the limited liability company as a more effective estate
planning alternative post-Cannon.
7
8
. See discussion infra Part II.B.
9
. See discussion infra Part III.
10
. See discussion infra Part IV.
11
. See discussion infra Part V.A.
12
. See discussion infra Part V.B.
13
. See discussion infra Part III.
14
. See discussion infra Part V.B.
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