Another great way to insulate your assets during a down economy and minimize your estate tax liability is starting a Family Investment Company (FIC).
Who can use this strategy? Families who want to lessen their estate tax burden, increase asset protection, and keep assets in the family.
What are the benefits? By gifting interests in your FIC with your family, you reduce your estate but retain control over the day-to-day operations.
What should you do next? Transfer a business or assets into an FIC, but structure it so that managerial control stays with you.
An FIC can be either a Limited Liability Company (LLC) or a Family Limited Partnership (FLP) Parents own units of the FIC and can gift units to children to take advantage of gift tax exemptions.
Family members are divided into general owners, who control day-to-day business, and limited owners, who are not involved in business operations. An FIC can help ensure continued family ownership of a business and provides liability protection for the limited owners.
For example, Mom and Dad own five rental properties. They form an FIC and transfer the properties into it in exchange for 100 percent ownership. They then gift units to children and grandchildren.
Mom and Dad keep control of the business and its assets while reducing the size of their taxable estate.
Forming an FIC holds several advantages:
• By gifting assets via FIC, instead of outright transfer, you should be able to gift more by using discounts, such as lack of marketability and minority discounts.
• When you die, only the value of your ownership interests in the company can be included in your estate.
• You can shift some of the business income and the future appreciation of its assets to family members.
• Restrictions in the FIC agreement can limit the transfer of ownership interests and ensure continuous family ownership.
When you form an FIC, it’s vital to maintain control at the general ownership level to avoid challenges by creditors. An FIC is just one of many asset-protection strategies your family can use. We advise you not to overuse it or turn it into the single target for all your assets.
Two parting thoughts:
First, treat your family investment company like a business, not like a family trust. The holdings in your FIC are for business or investment purposes. Any payments made by the FIC must assist those purposes. The FIC is not meant to hold your family home or pay college tuition. If someone in the family needs money, then it can be borrowed from the FIC at current interest rates or disbursed on a dividend.
Second, consider accelerating the gifting by using one of the other strategies we previously shared with you, such as an IDGT (Part 3 of this series).
Overall, an FIC is a great way to lessen your estate taxes, ensure continuous family ownership and maintain your control over the business and its assets.
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