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.</p>
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 *1030 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.