Are family corporations a good or bad idea?

A fellow caregiver asked...

Are family corporations a good way to protect assets and shelter from taxes? Years ago, my parents set up a corporation for their assets and my sisters and I have shares in it. Is this the best way for parents to pass an estate to their children?

Expert Answer

Liza Hanks is the founder and owner of FamilyWorks Estate Planning, a law firm with offices in Campbell and Los Altos, California, and the author of The Busy Family's Guide to Estate Planning (Nolo, 2007).

It's one way parents can pass along property to children. But be forewarned: There are complicated rules about gifting shares in private corporations.

You are all on safe ground if your parents properly valued those shares and reported the gift of those assets to the IRS if they were above the annual gift tax exclusion amount--currently $12,000 per person per year. If not, you may want to consult a tax attorney to find out whether the transfer was done properly so that you don't end up getting taxed and penalized for that gift.

Families with significant assets sometimes create family limited partnerships. These are business entities that hold family assets and manage them. Parents then transfer a percentage of that entity to their children. The reason to do this is that a gift of, for example, a 30 percent interest in a family limited partnership is usually valued at less than 30 percent of the total value of the assets because a limited partner has no control over the assets in the partnership.

It's a tricky way for parents to give assets to their kids at a discount. Again, if everyone follows the rules, it'll work. If not, it creates a big audit flag for the IRS.