Attention all state havens for income and transfer taxation (this means you Alaska, South Dakota, and Wyoming), prepare to be jealous of the latest state advantage in the effort to be the most taxpayer friendly haven for estate planning.
We return once more to the state of Nevada, where residents are so modest that, according to legend, even the indiscretions of visitors must never be revealed beyond the boundaries of Las Vegas. Judging from state legislation, the elected representatives of this community are equally protective of the estates of their constituents.
Nevada has just introduced something brand new, the Restricted LLC or LP. As signed by the Governor on May 29, 2009 (with effective date of October 1, 2009), SB 350 provides a statutory option allowing limited liability companies and limited partnerships the option of including in their original articles of organization or partnership agreement (or the amendments thereof) a provision that imposes restrictions on the making of member or partner distributions for up to 10 years.
This may be one of the first instances of state law adopting a new valuation-oriented variation on the Uniform Laws applicable to such entities.
"I feel a little like Neil Armstrong," said attorney Steven J. Oshins, of Oshins & Associates, LLC of Las Vegas, Nevada.
Oshins originally conceived of the statutorily created restriction in 2003 but it had taken a back seat to his efforts in coaxing the Nevada legislature to make charging orders the exclusive remedy of a judgment creditor of a member or partner of an LLC or LP, respectively (2003) and creating Nevada's 365- year rule against perpetuities (2005).
The new technique adds a useful and flexible option for LLCs and LPs that can shift valuations effectively for estate-planning purposes. Appraisers estimate additional valuation discounts ranging from 10% to 35% on top of the existing valuation discounts applicable to owning a minority or non-voting share of an LLC or LP.
A draftsman could structure restrictions for a specific number of years and set ceiling limits on distributions for that time period. One could design such an entity with specific circumstances and valuation discounts in mind.
Of course, even as the ink dries on the brand new Nevada law, the Treasury is considering drafting rules of their own to counter such valuation techniques by categorizing them as "disregarded restrictions." On the other hand, the Treasury can't dictate how willing buyers and sellers do business and how real restrictions affect value. There will be lobbying efforts and modifications to the Green Book proposals before they take their final form.
"This could impact the restricted LLCs and LPs," noted Oshins.
Nevertheless, the Restricted LLC and LP law is a fabulous innovation that may inspire a chain reaction of state specific variations on how LLCs and LPs are utilized. Vegas odds aren't available but the smart word on the street...always bet on Oshins. When the sun sets over the magnificent desolation of Nevada,1 there will likely be an Oshins-influenced solution to counter anything the Treasury can come up with.
1 "Magnificent desolation " takes its cue from the words spoken by the second astronaut to set foot on the lunar surface, Edwin "Buzz" Aldrin. After Aldrin had leapt from the Lunar Module and followed Armstrong out into history, Armstrong had queried, "Isn't that something! Magnificent sight out here." To which Aldrin replied, "Magnificent desolation," which inspired a 2005 documentary in 3-D by that same name. Aldrin then took communion on the moon. He may have been originally intended to be first on the moon. He recently appeared in an episode of The Simpsons on television and tells Homer, "Second comes right after first!" July 20, 2009 marks 40 years since the moon landing.