Watch your step! — Step transaction doctrine can increase tax on FLP and LLC gifts

Description

Abstract: Family limited partnerships (FLPs) and limited liability companies (LLCs) can allow the transfer of substantial amounts of wealth to loved ones at discounted values for gift tax purposes. But the entity must be treated as a legitimate, independent business, observing all business formalities. Otherwise, the IRS may conclude that the entity is a sham. It might then invoke the step transaction doctrine to collapse a series of transactions into a single transaction for gift tax purposes, dramatically altering the tax outcome. This article explains the doctrine, while a sidebar discusses the importance of filing proper documentation for an FLP or LLC.