The New Wyoming Close LLC Strategy
Gonnella & Majors, PC
Carol H. Gonnella
M. Jason Majors
Stephen P. Adamson, Jr.
P.O. Box 1226
575 South Willow Street
Jackson, WY 83001
(307) 734-0544 Facsimile
The New Wyoming Close LLC Strategy
The New Wyoming Close LLC Strategy ................................................. 2
Article 1 Structuring the Wyoming Close Limited Liability Company .. 4
Article 2 Requirements For An Effective Operating agreement. ............ 5
2.01. Manager Succession.........................................................................................5
2.02. Business Purpose. ............................................................................................5
2.03. The Wyoming Close Limited Liability Company as an Independent Entity. ..7
2.04. The Economic Relationship Among the Members. .........................................7
2.05. Initial Capital Contributions of the Members and Provisions for Recording
Additional Member Contributions. ..................................................................................7
2.06. Calls for Capital Contribution..........................................................................8
2.07. The Method for Determining the Capital Accounts of Members. ...................8
2.08. Loans from Members. ......................................................................................8
2.09. Restrictions on Distributions and Contributions. .............................................9
2.10. Operating and Liquidating Restrictions. ..........................................................9
2.11. Transfers of Interests........................................................................................9
2.12. Dissolution and Withdrawal. .........................................................................10
2.13. Classification of the Company for Income Tax Purposes. ............................10
2.14. Self- Employment Income. .............................................................................10
2.15. Gift and Estate Tax Issues..............................................................................11
2.16. Defined Value. ...............................................................................................15
Article 3 Valuation Of Wyoming Close LLC Interests. ........................ 16
3.01. Lack of Control Discount...............................................................................16
3.02. Lack of Marketability Discount. ....................................................................16
3.03. Characteristics of a Wyoming Close LLC Enhancing Valuation Discounts. 17
3.04. Internal Revenue Code vs. Valuation Discounts and Transfer Taxes. ..........17
3.05. Valuation of the Wyoming Close LLC. .........................................................19
Article 4 Audit-Proofing The Wyoming Close LLC.............................. 20
Article 5 Reasons for Using a Wyoming Close LLC ............................. 23
5.01. Economic Reasons for Using a Wyoming Close LLC ..................................23
5.02. Noneconomic Reasons for Using a Wyoming Close LLC ............................23
Article 6 The Wyoming Close LLC vs. a FLP ....................................... 25
6.01. Benefits of the Wyoming Close LLC ............................................................25
6.02. Detriments of the Conventional FLP .............................................................25
6.03. The Traditional FLP/General Partner Entity Two Step .................................26
Structuring the Wyoming Close Limited Liability Company
Parents are the managers
of the Close LLC for their
lifetimes, preserving their
control over the assets of
Assets are placed into the Wyoming Close LLC. By virtue of
the fact that all control over the entity is vested in the
managers, and the members cannot sell or convey their
interests in the Company, the interests of the members are
discounted for a lack of control and marketability. The
Wyoming Close LLC also offers enhanced creditor protection
with regards to the assets held in the Company.
If the Wyoming Close LLC creates
Parents, through their revocable trusts, income, that income can be
convey assets to the Wyoming Close
distributed to the members in
LLC, taking back membership accordance with their ownership
interests in the Company. interests in the Company.
Parents then gift some or all of their membership interests to their children,
using the discounted value of the membership interests, either outright or to
Wyoming Dynasty Trusts established for their children‟s benefit. These
interests are greatly protected against the claims of any member‟s creditors. If
a Wyoming Dynasty Trust is used, the membership interests can be utilized for
the benefit of many generations of the parents‟ descendants.
Requirements For An Effective Operating agreement.
The requirements for forming the company and drafting the operating agreement for the client
must be followed with extreme care.
2.01. Manager Succession
Due to the fact that the Wyoming Close Limited Liability Company will continue to exist long
after the death of the client, the client will also need to make provisions in their estate plan for
the passing of management of the company. The designation of an appropriate beneficiary or
fiduciary to serve as a successor manager is imperative if the Wyoming close limited liability
company is going to effectively continue and operate long after the death of the client.
2.02. Business Purpose.
As discussed previously, the company needs to have a valid business purpose in order to avoid
some of the scrutiny of the Internal Revenue Service, and any arguments by that agency that the
Wyoming close limited liability company is solely a tax avoidance device. As discussed
previously, there are a myriad of different non-tax reasons for forming a Wyoming close limited
liability company. In order to err on the side of caution it is most often advisable to throw as
many potential business purposes into the operating agreements as are appropriate to the facts of
the particular company. Not only do these lists provide better guidance to the members, but they
also help to stave off Internal Revenue Service attacks on the company. Following is a non-
exhaustive list of business purposes typically set forth in an operating agreement or membership
a. To Create Financial Gains for the Members.
1. Realize Profits.
2. Increase Wealth.
3. To Avoid Two Layers of Taxation on Profits.
4. Reduce State Taxes.
5. Reduce Income Taxes.
6. Qualify for the Family Business Exclusion in the Taxpayer Relief Act of
7. Self-Employme nt Tax.
8. Wyoming Close Limited Liability Company Income is Not Subject to
b. To Provide Better Management and Control of Wyoming close limited
liability company Assets.
1. Consolidate Fractional Interests.
2. More Efficient Management of Assets.
3. Better Negotiating Position.
4. Make Dealing with Third Parties Easier.
5. Reduce or Eliminate Disputes Between Membe rs.
6. Manage and Develop Real Estate.
7. Establish an Order of Succession.
8. Allow for More Flexible Business Planning.
c. Financial Ope ration.
1. Facilitate Transfers of Assets Among the Family.
2. Facilitate Annual Gifting.
3. Control Cash Flow to Members.
4. Provide a Buy-Sell Arrangement without having to have a separate Buy-
5. Resolve Disputes Privately.
6. Provide Confide ntiality.
7. Promote Knowledge of Family Assets.
8. Keeping Family Membe rs in Touch.
9. Equalize Voting Power Among Family Units.
d. Minimize Costs Resulting From the Disability or Death of a Partner.
1. Avoid Living Probate.
2. Avoid Death Probate.
3. Reduce the Impact of Income in Respect of a Decedent.
e. Provide Creditor Protection to the Members.
1. Restrict the Right of Non-Membe rs to Acquire Interests.
2. Prevent Transfers of Wyoming close limited liability company Interests
Because of Failed Marriages.
3. Prevent Commingling of the Assets of Gift Recipients.
4. Protect Against Future Creditors of Members.
f. Provide Asset Protection.
2.03. The Wyoming Close Limited Liability Company as an Independent
Above all, the clients using a Wyoming close limited liability company must be aware that the
Wyoming close limited liability company is a separate and discrete entity. The members must
only use the company accounts and assets for company purposes and must not use the company
accounts as their own personal bank. If the members were to use the company accounts as their
own, they will most likely defeat the business purpose of the company and create a scenario
whereby the company is rendered invalid, and a part of the transferring member‟s estate for
Federal estate tax purposes.
2.04. The Economic Relationship Among the Members.
Another important aspect of the operating agreement is to set forth the economic relationships
between the different members. In order to keep from running afoul of Code §§ 2703 and 2704,
the operating agreement must not contain limitations on the distribution of company assets in a
way, which is more restrictive than the state law default rules. In any event, the distribution of
company assets must be addressed in the operating agreement in order to avo id disputes among
the members regarding distributions, and in order to further bolster the business purpose of the
2.05. Initial Capital Contributions of the Members and Provisions for
Recording Additional Member Contributions.
Initial capital contributions of the members as well as provisions for recording additional
member contributions must be set forth in the operating agreement. A related aspect is that of
restrictions on additional contributions. These provisions relate to the capital accounts of the
members, and careful record keeping will avoid many disputes regarding distributions to the
2.06. Calls for Capital Contribution.
The operating agreement should also contain provisions for additional capital contribution calls,
and should include provisions regarding member penalties if the additional capital contribution
calls are not met. One major reason for adding capital contribution calls to the operating
agreement is that it provides a vehicle for forcing out or reducing the company interests of a
recalcitrant or difficult member.
2.07. The Method for Determining the Capital Accounts of Members.
The capital accounts of members are another area of the company which must be addressed with
some detail. There are two primary methods for determining the member‟s capital accounts:
a. Fair Market Value Plus.
The “fair market value plus” of determining a member‟s capital account consists of
taking the fair market value of a member‟s contributions to the company, plus any
income allocated to those contributions, less the fair market value of any distributions and
losses allocated to those contributions, plus any liabilities of the company assumed by the
member, and less any liabilities of the member assumed by the company
fair market value of a member‟s contribution
+ income and gains allocated to the member‟s contribution
- fair market value of distributions and losses allocated to member‟s
+ liabilities of the company assumed by the member
- liabilities of the member assumed by the company
= me mber’s capital account
b. Safe Harbor Method.
The second method for determining a member‟s capital account is the “safe harbor
method” provided for by I.R.C. § 704(b). The safe harbor method assigns a percentage to
the member‟s company interest. This percentage is multiplied against all company
income, gains, losses, deductions and credits.
(%) x company income
+ (%) x company gains
- (%) x company losses
- (%) x company deductions
+ (%) x company credits
= me mber’s capital account
2.08. Loans from Members.
It is generally wise to have the operating agreement include provisions regarding loans from the
members. This language provides more definitive guidelines in the event of a loan.
2.09. Restrictions on Distributions and Contributions.
Any restrictions on distributions, as well as restrictions on contributions need to be set forth in
the operating agreement. In order to avoid having the company hold unproductive property or
excessive securities, the operating agreement needs to have the restrictions clearly contained
therein. Additionally, the operating agreement may need to contain restrictions on pro rata
distributions or distributions in kind.
2.10. Operating and Liquidating Restrictions.
It is wise to have language in the operating agreement which sets forth that distributions will be
made in proportion to the capital accounts of the members. If this standard is varied IRC §
704(b), safe harbor distributions, IRC § 704(e), distributive share included in gross income, IRC
§ 2701, special valuation rules, or IRC § 2704, treatment of certain lapsing rights and
restrictions, may be implicated.
2.11. Transfers of Interests.
Since some of the advantages of a Wyoming close limited liability company are keeping assets
in the family, under the control of the manager, and enhanced creditor protection, it is advisable
to have the operating agreement contain language restricting the transfers of membership units
except for certain detailed exceptions. Some of the pertinent language could be as follows:
a. Inte r-Family Transfers.
A member could be allowed to transfer membership units to his or her spouse, children,
more remote descendents, or a trust for their benefit, but only with the consent of the
b. Transfer as a Present Interest for Annual Gift Tax Exclusion.
In order to qualify a transfer of membership units as a present interest for the annual gift
tax exclusion, the transferee must have a right to receive a substantial economic benefit
as a result of the transfer, meaning the transferor must also transfer the right to receive
distributions associated the membership units transferred. Hackl v. Commissioner, 118
TC 279 (2002). Transferring the right to receive distributions also helps the transferor to
avoid and retained interest arguments that the Internal Revenue Service might try to make
under Code § 2036.
c. Consent to Transfers of Membership Interests.
Other pertinent language relates to the requirement that the other members or the
manager consent to the transfer of membership units before such a transfer is made. This
provision keeps creditors from obtaining membership units.
d. Voidable Transfers.
It is also wise to add language in the operating agreement that transfers made in violation
of the operating agreement are voidable at the option of the other members or the
e. Assignee Rights.
The operating agreement should also make clear what rights an assignee has in the
company. The operating agreement will most often want to restrict the rights of an
assignee to only receive distributions and to prohibit an assignee fro m having any control
or other rights in the Wyoming close limited liability company.
2.12. Dissolution and Withdrawal.
The operating agreement should cover the event of dissolution of the company as well as the
withdrawal of a member.
In the event of dissolution of the company, the company will need to set forth the process
for the members to agree to the dissolution as well as the means for distributing the assets
of the company in accordance with the capital accounts of the members.
b. Withdrawal of a Partner.
In the event that a member of the company wishes to withdraw from the company, it is
advisable to have the operating agreement set forth the manner for the member to
withdraw as well as the method for either making distributions of that member‟s interests
in the company or means for the company to repurchase that member‟s membership
units. The withdrawal provisions should also address the death, incapacity or bankruptcy
of a member.
2.13. Classification of the Company for Income Tax Purposes.
The operating agreement also needs to address the issue of partnership classification for purposes
of income taxes. With the advent of the „check the box‟ classification of entities, less attention
needs to be given to classifying the entity in the operating agreement. However, if the company
wishes a different taxation scheme, or the company is sited in a state requiring the company to
make an income tax election in its operating agreement, the operating agreement will need to
address this issue.
2.14. Self-Employment Income.
IRC § 1402(a)(13) sets forth two different standards for self-employment taxation of the
members depending on whether the member is a limited or manager. Self-employment income
is subject to a Social Security tax of 12.4%, plus the 2.9% hospital insurance tax. IRC § 1401.
Self-employment income is only an issue if the Wyoming close limited liability company
engages in the active conduct of a trade or business.
a. General Partner.
The management fee paid to the manager is subject to self-employment tax, while the
distributions of profits are not.
b. Membe r.
The distributive share of a member who is both a manager and member will not be self-
2.15. Gift and Estate Tax Issues.
a. Special Valuation Rules.
In order to avoid the special valuation rules of IRC § 2701, each member should be
entitled under the operating agreement to distributions based upon his or her percentage
of ownership interest in the Wyoming close limited liability company, which should be
determined by comparing his or her capital account with the total capital accounts of all
members. Additionally, this method of accounting avoids the substantial economic effect
test of IRC § 704(b), satisfies the IRC § 704(e) family company rules, and avoids
inadvertent lapses under IRC § 2704(a).
b. Issues When 50% or More of Membership Units are Owned by Family.
Whenever a company is controlled by members of the same family Chapter 14 of the
Code imposes certain additional rules with regard to companies. For purposes of Chapter
14 “control” is defined as the family members of one family holding of at least 50 percent
of the interests in the company, or, in the case of a limited company, any one or more
members of the same family holding any interest as a manager. For purposes of § 2701,
“family members” includes the spouse of the transferor, any lineal descendant of the
transferor or of the transferor's spouse, and the spouse of any such descendant
1. Code § 2701 - Special Valuation Rules
Code§ 2701 imposes special valuation rules for gift tax purposes when an interest
in a family controlled company is transferred to a family member. This section
assigns a value of zero to certain interests retained by the transferor, thereby
increasing the value of the interests that have been transferred. Thus, for
example, retained put, call, and conversion rights are assigned no value under
Code § 2701, loading value onto the transferred interests and thereby defeating
traditional company freeze arrangements, which depended on the value of
retained interests to reduce the amount of the taxable gifts made when interests
are transferred to junior family members.
Code § 2701 gives special treatment in several ways to distribution rights with
respect to a retained company interest. For instance, distribution rights are
disregarded if the transferor and certain members of his family control the
company. However, a distribution right is accorded full value if it is a cumulative
right to receive a distribution determined at a fixed rate or at a floating rate tied to
a specified market interest rate.
2. Code § 2704(a) - Lapsing Rights
Code § 2704(a) treats the lapse of any voting or liquidation right in a company as
a deemed transfer by gift if the transferor and members of his family control the
entity both before and after the transfer. The amount of the deemed transfer under
§ 2704 is equal to the difference between the value of all interests in the entity
owned by the transferor before the lapse of voting or liquidation rights and the
value of such interests immediately after the lapse. For this purpose, voting and
liquidation rights are valued before the lapse as if those rights were nonlapsing.
c. Restrictions on Liquidation or Transfer.
The following limitations contained in the operating agreement must also be address ed in
order to ensure compliance with the code, irregardless of whether the company is
controlled by members of one family.
1. Code § 2703(a) – Restrictions on Sale or Use of Members hip Property
Chapter 14 of the Code also takes aim at another familiar estate planning
technique—private restrictions such as buy-sell agreements and transfer
restriction agreements. Under § 2703(a), a buy-sell agreement, particularly one at
a fixed price, must have a business purpose (e.g., continuity of management) and
must not be a device for passing on the transferor‟s business interest to his or her
descendants at a bargain price.
Code § 2703(a) provides that for purposes of the gift tax, the estate tax, and the
generation-skipping transfer tax, property is valued without regard to options or
agreements to acquire the property for less than fair market value and without
regard to any restriction on the right to sell or use the property. This rule contains
no reference to family relationships.
a. Code § 2703(b) – Safe Harbor Provisions
However, the provisions of Code § 2703 will be disregarded if the safe
harbor provisions of Code § 2703(b) are met, which require that the
restriction (1) is a bona fide business arrangement, (2) the restriction is not
a device to transfer property to member of the transferor‟s family for less
than full and adequate consideration in money or money‟s worth, and (3)
the terms of the restriction are comparable to similar arrangements entered
into by persons in an arm‟s length transaction.
2. Code § 2704(b) - Restrictions on Liquidation
Code § 2704(b) attacks valuation discounts based on restrictions on the ability of
a company to liquidate. Like Code §§ 2701 & 2702, Code § 2704(b) determines
the value of an ownership interest by disregarding features of that interest which
would otherwise be taken into account in determining fair market value. Only
“applicable restrictions” are disregarded under Code § 2704(b). An applicable
restriction generally is a restriction limiting the ability of a company to liquidate.
There is the further requirement, though, that either (1) the restriction must lapse,
in whole or in part, after the interest in the company has been transferred or (2)
the transferor or any member of his family, alone or collectively, must have the
right to remove the restriction after the transfer.
This definition of “applicable restriction” provides a planning opportunity for a
client who does not object to conferring on a remote relative or unrelated person
the authority to veto any decision to liquidate a family company. For example, a
nephew of the transferor can be included as a member in a family company with a
sole veto power over any decision to liquidate the company. This restriction on
liquidation is not an “applicable restriction” as defined in Code § 2704(b),
because a nephew is not a “member of the family” as defined in Code §
Attention must also be given to the ability of a manager in this circumstance to
liquidate the company under state law and the possibility that state law does not
permit the governing rule to be altered by agreement of the parties. Similarly, any
provision in the operating agreement concerning amendment of the agreement
must be carefully drafted so that the restriction on liquidation rights cannot be
removed without the consent of a nonfamily member.
a. Code § 2704(b) - Exceptions
There are two important exceptions to the definition of “applicable
restriction” in Code § 2704(b). An applicable restriction does not include
a commercially reasonable restriction arising as part of a financing by the
company with a person not related to the transferor, the transferee, or a
member of the family of either. An applicable restriction also does not
include any restriction “imposed, or required to be imposed, by any
Federal or State law.
The conference committee report acknowledges that the Code § 2704(b) rules
concerning lapsing rights and restrictions on liquidation “are intended to prevent
results similar to that of Estate of Harrison v. Commissioner, 52 T.C.M. (CCH)
1306 (1987)” which involved a lapsing right to liquidate a company. However,
the conference report also states that “[t]he conferees intend that no inference be
drawn regarding the transfer tax effect of restrictions and lapsing rights under
present law.” Thus, congressional tax writers have implied that the Service may
continue to challenge discounts in cases such as Harrison even if Code § 2704
does not apply because of its effective date.
The conference report provides that “[the Code § 2704] rules do not affect
minority discounts or other discounts available under present law.” This
legislative history suggests, for example, that nonvoting common stock or
interests in a company as a member may still qualify for lack of marketability,
lack of control, and minority interest discounts. However, the “knock down” net
asset value of the entity in question may present a floor for valuation purposes if
interests are considered to have the ability to liquidate the entity in all events
under the general rule of Code § 2704(b).
d. Annual Gift Tax Exclusion.
If annual gifting is important to the client, it may be necessary to have the operating
agreement contain language giving the member the right to assign his or her membership
units to a third party after first offering to sell the units back to the company upon the
same terms. Moreover, in order to avoid inclusion of the manager‟s units in his or her
estate, the operating agreement should clearly set forth that the manager has fiduciary
duties to the remaining members.
e. Stock in a Closely Held Corporation.
If stock in a closely held corporation is transferred into the Wyoming close limited
liability company, the stock may be included in the contributing member‟s estate if that
member retains the right to vote that stock under IRC § 2036(b). Therefore, the operating
agreement should contain some language prohibiting a member transferring closely held
stock from retaining the right to vote the stock. Or, there could be a provision in the
agreement that someone independent from the contributing member, such as his or her
CPA, can vote the stock.
f. Special Allocations.
The operating agreement should also contain language regarding the allocation of the
company‟s income, gains, losses, deductions and credits among the members. IRC
§704(b). Usually the drafter will want to adopt the safe harbor provisions of Treasury
Regulations § 1.704-2. The operating agreement should contain language regarding the
contribution of highly appreciated property in order to address the co ntribution of that
property by the member pursuant to IRC § 704(c)(1)(A).
g. Payment of Reasonable Compensation.
If a member performs services for the company, it is advisable to have the operating
agreement contain language providing the rendering member with reasonable
compensation for his or her services.
h. Constructive Termination of the Wyoming Close LLC.
It is also wise to have the operating agreement contain provisions that the company will
not be terminated by the transfer of any membership units under IRC § 708(b)(1),
because there was a transfer of 50% or more of the membership units in a 12 consecutive
i. Basis Adjustment.
Since the assets within a company can obtain a step-up in basis for federal income tax
purposes pursuant to IRC § 754 when company assets are sold or exchanged and the
purchase price or fair market value of the sale exceeds the contributing member‟s basis in
the asset. If the operating agreement makes the basis adjustment discretionary, the asset
will have a depressed value because the prospective purchaser cannot be certain that the
election to adjust the basis will be made.
2.16. Defined Value.
An extremely valuable provision to have in a operating agreement is a “defined value clause” as
insurance against an attack on valuation by the Internal Revenue Service. A defined value clause
essentially provides that in the event that a valuation is found to be erroneous, the client gifted a
defined dollar value of membership units instead of making a gift of a finite number of
membership units. For example, assume that in particular year your client made a gift of a
certain number of membership units to a member, using that client‟s annual exclusion amount.
If the Internal Revenue Service were able to prove that the valuation was wro ng there is a very
strong likelihood that the client would have gifted membership units exceeding the annual
exclusion amount. A defined value clause would indicate that the client gifted membership units
equaling, but not exceeding, the client‟s annual exclusion amount for that year.
A trap for the unwary is to put a “price adjustment clause” in the operating agreements. Price
adjustment clauses indicate that if a valuation is determined to be incorrect, the client can obtain
a new value for that gift and make it retroactive. The courts have long since buried this drafting
Valuation Of Wyoming Close LLC Interests.
One of the primary advantages in forming a Wyoming close limited liability company is to
transfer wealth to younger family members, and have that wealth discounted for lack of control
and lack of marketability. In essence, the older generations can transfer more wealth with each
transfer as a result of the discount than they could have transferred at the fair market value of the
assets transferred. This section of the materials will outline some of the valuation issues
associated with Wyoming close limited liability company planning. Of course, the Wyoming
close limited liability company must still have some bona fide business purposes in order to
avoid having the valuation discounts ignored by the Internal Revenue Service, as addressed
3.01. Lack of Control Discount.
The lack of control discount, also commonly referred to as a minority interest discount, is
appropriate whenever valuing an interest in an entity that does not give the holder of the interest
the right to decide when distributions of earnings will be made, when the entity will be
liquidated, and other issues affecting the financial benefits of ownership in the entity. As
discussed previously herein, if the operating agreement has been correctly drafted, the Wyoming
close limited liability company will have all of these restrictions built into it.
3.02. Lack of Marketability Discount.
The problem with a lack of control discount is that it can also bring into play a control or swing
vote premium. If the operative agreement provides the holder of a majority interest, or a
manager with more control over the company, that individual will possess an enhanced degree o f
control over the company, and therefore will not receive such a discount on his or her company
interests. The only exception to this general rule occurs when the manager can cause a
liquidation of the company. In this situation, the lack of marketability discount is zero because
the manager is entitled to no more than his or her pro rata share of the company assets.
In most Wyoming close limited liability companies involving real estate and other passive
investments, including marketable securities, the value of the company‟s assets are usually worth
more than the value of the company as a going concern. Therefore, any restriction on the right of
a member to cause a liquidation of the company, or to have his or her interest redeemed at a price
equal to a pro rata share of the value of the company‟s assets will be important in ensuring that
the interest is entitled to a lack of control discount, assuming the restriction is not disregarded for
Federal transfer tax purposes.
The lack of marketability discount takes into account the fact the owner of an interest in a
nonpublicly traded entity will have more difficulty in finding a willing buyer of his or her
ownership interests in order to sell those interests, and may incur expenses such as legal,
accounting and syndication fees. With a publicly traded company, the shares of stock already
reflect a lack of control discount, but will virtually never possess a lack of marketability discount
due to the fact that the shares are sold on a recognized exchange and by definition are
3.03. Characteristics of a Wyoming Close LLC Enhancing Valuation
The following characteristics should be built into the operating agreement in order to enhance the
lack of control and lack of marketability discounts:
a. Lack of Management or Voting Rights in the Members.
A lack of management or voting rights in the members will limit the amount of control
that the members have in the day-to-day affairs of the company. The Wyoming Close
LLC statutes allow for all management to be vested in the managers of the company.
b. Absence of Redemption Rights.
If the operating agreement prohibits a limited or manager from redeeming their interest in
the company, or in other words, prohibition against requiring the company to buy out the
member‟s interest in the company, the members are unable to convert their membership
units into any real value. This prohibition severely discounts the actual value of a
membership unit. The Wyoming Close LLC statutes provide that a member cannot get a
return of his or her contribution without the unanimous consent of the remaining
c. Restrictions on Transferability.
If the operating agreement restricts a member‟s ability to transfer or assign his or her
interests to a third party, the member is unable to sell or exchange his or her membership
units for value. This prohibition further diminishes the value of the membership units
since the members are again able to realize any real value as a result of the sale,
assignment or exchange of their membership units. The Wyoming Close LLC statutes
provide that a member cannot transfer his or her membership units without the
unanimous consent of the remaining members.
d. Restrictions on Withdrawal
An operating agreement which also restricts a member‟s ability to withdraw as a member
from the company will help deepen the lack of control and lack of marketability discount.
The Wyoming Close LLC statutes provide that a member cannot withdraw without the
unanimous consent of the remaining members.
3.04. Internal Revenue Code vs. Valuation Discounts and Transfer Taxes.
The Internal Revenue Code contains several different sections relating to valuation discounts and
transfer taxes which must be kept in mind when forming the Wyoming close limited liability
company and when transferring assets within the Wyoming close limited liability company.
a. Annual Gifting of Present Interest.
IRC § 2503(b) allows the annual gifting exclusion only if the gifted interest is a present
b. Retained Interest.
IRC § 2036(a)(1) requires property to be included in a transferor‟s estate for estate tax
purposes if the transferor retains possession, the beneficial use and enjoyment, or the
right to income from the transferred property.
c. Designation of Beneficiaries.
IRC § 2036(a)(2) requires property to be included in a transferor‟s estate for estate tax
purposes if the transferor has retained the right to designate the beneficiaries who will
possess or enjoy the property, or the income resulting therefrom.
d. Closely Held Stock.
IRC § 2036(b) requires shares of closely held stock to be included in a transferor‟s estate
for estate tax purposes if the transferor retained the right to vote the shares of closely held
e. Retained Rights to Affect Transferred Interest.
IRC § 2038 requires property to be included in a transferor‟s estate for estate tax
purposes if the transferor has retained the right to alter, amend, revoke or terminate the
f. Special Valuation Rules.
IRC § 2701 applies special valuation rules when an older family member transfers a
junior or residual equity interest to a younger family member and retains a senior or
preferred equity interest.
g. Commercially Reasonable Restrictions.
IRC § 2703 ignores a right or restriction affecting valuation, if the right or restriction is
not commercially reasonable.
h. Lapse of Voting or Liquidation Rights.
IRC § 2704(a) treats a lapse of a voting or liquidation right as a taxable gift, if the lapse
occurs during the transferor‟s lifetime, or as a part of the estate if the lapse occurs at the
i. Liquidation Limitations.
IRC § 2704(b) ignores any limitations on the right of a member to liquidate his or her
membership units if the restriction is more restrictive than the law of the state where the
Wyoming close limited liability company is formed for valuation purposes.
3.05. Valuation of the Wyoming Close LLC.
While valuation of interests in a Wyoming close limited liability company is very dependent
upon the law of the state where the company was formed and the operating agreement of the
company, there are certain factors which almost always come into play.
a. Different Values for Managers and Members.
Due to the fact that managers exercise all of the control over the Wyoming close limited
liability company, and members lack virtually any control over the company, the lack of
control discount will vary as between the membership units of the managers and
Additionally, since the member has no rights under state law or the operating agreement
to have his or her membership units redeemed until the end of the term of the company,
the member‟s membership units will attain an even higher discount for lack of
Moreover, since the member lacks the right to transfer, assign, or sell his or her
membership units to a third party, the member‟s membership units will again obtain a
deeper valuation discount due to lack of marketability and control.
b. Business Appraisals.
A professional business appraisal should be obtained in every situation involving
planning for transfers of interests in a family controlled entity. If the Internal Revenue
Service challenges the valuation and there is no business appraisal, the client may be
forced to have the value of the company‟s assets determined many years after the transfer
of the property to the company, and transfers of membership units within the company,
raising the possibility of penalties, interest and gift taxes. Additionally, a professional
valuation will put the client in a better position to defend Internal Revenue Service
attacks regarding the lack of control and lack of marketability discounts already taken.
Furthermore, the client will be required to provide substantiation for the discount taken
on any gift tax return filed, and the professional appraisal will help to suppor t the
valuation discounts taken. Finally, the adequate disclosure rules are better satisfied
through the use of a professional appraisal, and will help to start the statute of limitations
running on the gifts made. Treasury Regulations § 301.6501-1(f)(3).
Audit-Proofing The Wyoming Close LLC.
From the moment a Wyoming close limited liability company is considered as a planning tool, it
is wise to consider the audit process. The careful planner will document, document, and
document all aspects of the strategy. Given the wonderful benefits from the Wyoming close
limited liability company, most clients are willing to take the risk to reap the reward from the
many benefits of the company, only one of which is reduction in transfer taxes.
The IRS focuses on five basic areas of attack to either disallow the Wyoming close limited
liability company in its entirety or to reduce (or eliminate) the discounts.
The five areas of attack are as follows:
a. Entity Formation, Timing and Funding
With this argument, the IRS seeks to adopt a “step transaction” or “gift on formation”
approach. This issue is often raised when the death-bed or terminally ill donor creates the
Wyoming close limited liability company and makes gifts immediately before death.
With this argument, the IRS ignores Code Section 2035, which allows gifts in
contemplation of death. (Except gifts of life insurance and certain trust transfers).
The key to this issue is whether the donee gains value by reason of the entity formation.
In the usual situation, the parents contribute the appreciated property into the Wyoming
close limited liability company in exchange for membership units. The gift of
membership units is thereafter made to children, not a gift of a share of the entity-owned
To avoid this argument, care must be taken in the formation of the entity. By way of
example, the following steps must be taken:
1. The articles of organization must be filed before any gifts are made.
2. The Wyoming close limited liability company must be funded with the
company assets before any gifts are made.
3. Any subsequent additional asset contributions must be made with
appropriate capital account changes.
4. All gifting should be done in writing and accepted with clearly defined
5. The CPA should maintain a ledger of all gifts for each year.
b. Entity Operation
The IRS is scrutinizing the actual operational history of the Wyoming close limited
liability company. The issue is whether the entity was truly operated as an entity, or was
it ignored by the donor. If the Wyoming close limited liability company was ignored, the
entity will be disregarded as a sham and brought back into the estate under IRC Section
The steps to be taken include:
1. The donor manager‟s control must be limited by company fiduciary
obligations, and the donor and children can not have an understanding or
agreement that the donor is able treat the assets during life as his or hers.
2. If a home is in the company, ensure that whoever is living in the home
(donor or children) is paying a fair market rent and that a lease is signed.
3. The company needs its own bank account, and all income and expenses of
the company are run through this account.
4. All members must be treated as real members. For example, in a pro rata
company, make sure the senior member (donor) does not take distributions in
excess of his/her pro rata equity interests over and above any reasonable specified
c. Substance Over Form.
This is a vague and tenuous argument of the IRS. It in e ssence states that the mere
insertion of an entity (such as a Wyoming close limited liability company) between the
outright gifts of cash, marketable securities or real estate from one family member to
another is a “sham transaction” a “step-transaction” or “substance over form”. These
arguments are usually thrown in with the assertion that the only purpose or motive in
creating the company was to create minority interests with discounts to lower estate
These arguments are only won with egregious fact situations, as in the Estate of Murphy
v. Commissioner, T.C.M. 1990-472. In addition to all the suggested steps stated above,
the following should be followed:
1. Multiple purposes should be stated in the operating agreement document
and in all correspondence with the client.
2. If at all possible, have the client create the Wyoming close limited liability
company well in advance of death. However, in practicality, this is not always
possible, as immanent death is sometimes the motivator to implement the
planning suggested to the client for years.
d. Chapter 14 Argume nts.
Chapter 14 codified the special valuation rules with intra family transfers. The IRS has
used IRC §§ 2703 and 2704 to attack Wyoming close limited liability companies.
Under § 2703, the IRS has argued that the company entity should be entirely disregarded
even though it was validly created under state law because the property “transferred” is
the donor‟s interest in the property of the company, as distinguished from a transfer of
company interests. The claim is that the value is determined by the percentage of interest
the donor has in the assets of the company, disregarding the entity.
This argument ignores the fact that the transfer tax is a tax on the “transfer of property”
as stated in IRC § 2033. The test for value is generally the property‟s fair market value
and the time of the gift or death. Courts have refused to consider familial relationships
among co-owners in valuing property. The standard is an objective test using
hypothetical buyers and sellers in the marketplace, and is not a personalized one which
envisions a particular buyer and seller. LeFrak v. Commissioner, 66 T.C.M. (CCH)
If the drafter of the Wyoming close limited liability company documents follows the
“safe harbor” requirements of Section 2703, the IRS should not prevail with this
argument. Those safe harbor requirements are:
1. The company represents a bona fide business arrangement.
2. The transfer to family members was made for full and adeq uate
consideration in money or money‟s worth.
3. The terms are comparable to similar arrangements entered into by persons
in an arm‟s length transaction.
The arguments raised by the IRS regarding valuation are addressed in another section of
this outline. However, it is of great importance to always obtain a business valuation in
addition to a fair market value appraisal of the property to be transferred into the
company. The business appraisal should be prepared by a qualified appraiser and all
relevant information and comparisons of value should be included in the report. A good
discussion of valuation appraisals is found in Estate of Weinberg v. Commissioner, T.C.
In the case of Estate of Murphy v. Commissioner, T.C.M. 1990-472, in which the court
held that a minority discount was not applicable to stock of a closely held corporation
owned by the decedent although the decedent owned slightly less than 50% of the stock
at the time of her death. In Murphy the decedent had transferred a 1.76% interest to her
children 18 days before her death specifically to reduce her interest in the corporation
below 50%. The primary problem with Murphy was that the decedent‟s accountant had
written several letters to the decedent prior to her death, urging her to convey the 1.76%
interest in the company solely to obtain a minority interest discount at her death.
Needless to say these letters became exhibits at the trial and drive home the point: be
careful what you write since the Internal Re venue Service may be looking at the
document in the future. The Internal Revenue Service understandably argued that a
minority discount should not be applied when the sole purpose and effect of fragmenting
the controlling block of stock was only to reduce Federal estate tax.
The converse of Murphy was the case of Estate of Frank v. Commissioner, T.C.M. 1995-
132. In Frank the court held that the transfer of stock two days before the decedent‟s
death by his son, acting under a power of attorney, to the decedent‟s spouse eliminating
the decedent‟s controlling interest in the corporation was valid. The court relied on the
fact that a larger portion of stock was transferred than was necessary to reduce the
controlling interest indicating that tax avoidance was not the primary motive for the
Reasons for Using a Wyoming Close LLC
5.01. Economic Reasons for Using a Wyoming Close LLC
a. Gifts of Wyoming Close LLC Membership Interests
The discounted value of the membership interests in the Wyoming Close LLC can
be used for purposes of making gifts to children.
The discounted value of the membership interests in the Wyoming Close LLC can
be used for the purpose of minimizing estate taxes.
If the assets of the Wyoming Close LLC are income producing, the parents ca n
shift income to their children gift tax free.
Income passing to the children from the Wyoming Close LLC is taxed at the
children‟s individual income tax rates instead of the parents‟ income tax bracket.
If the Wyoming Close LLC is coupled with a Wyoming Dynasty Trust, the assets
can avoid erosion due to estate taxes for many generations to come.
b. Outright Interest Gifts
If parents want to make gifts of valuable assets, they have to use the undiscounted
fair market value of those assets when making gifts to children.
If parents pass away with valuable assets in their estate, their estates will pay
estate taxes on the undiscounted fair market value of those assets.
If parents give income realized from an asset to their children, it is an additional
gift to the children, subject to gift tax rules and regulations.
Before parents can gift income earned from their assets to their children, the
parents will have to pay the income taxes associated with that income at their own
income tax brackets.
If valuable assets are distributed outright to children, and thereafter to their
descendants, the assets will be subject to estate taxes at the death of each
5.02. Noneconomic Reasons for Using a Wyoming Close LLC
a. Gifts of Wyoming Close LLC Membership Interests
The parents are able to retain the management and control of the assets contained
in the Wyoming Close LLC as long as they are alive and able.
The membership interests offer greatly enhanced creditor protection should any of
the members be sued.
The membership interests cannot be transferred to the spouse of a member in the
event of divorce, keeping the membership interests in the immediate family.
Parents have the ability to teach their kids how to manage and grow the assets
during the parents‟ lifetimes, and how to effectuate proper stewardship of the
The Wyoming Close LLC contains provisions as to how disputes regarding the
assets are handled.
By virtue of the fact that all of the assets are preserved as a whole in the
Wyoming Close LLC, the Company has more leverage as to how the assets are
used, sold or encumbered.
The Wyoming Close LLC offers a continuous component to the estate plans of
the parents‟ descendants.
b. Outright Interest Gifts
Once the assets are gifted or pass outright to children, the parents have no control
over how the assets are used.
Once assets are gifted or pass outright to a child, those assets are subject to the
claims of the child‟s creditors.
Once the assets are gifted or pass outright to a child, those assets are subject to the
claims of the child‟s spouse in the event of divorce.
Once the assets are gifted or pass outright to the children, the assets become
completely subject to the control of the children and can be diminished depending
on how the children manage the assets.
Once the assets are gifted or pass outright to a child, the child can do whatever
they wish with the assets, even if the other owners of the assets do not agree.
Once the assets are gifted or pass outright to a child the assets become
fractionalized, and it is more difficult to use, sell or encumber the assets as a
Once the assets are gifted or pass outright to the children, the children can dispose
of the assets in their estate plans in any manner they desire.
The Wyoming Close LLC vs. a FLP
There are certain benefits that the Wyoming Close LLC can achieve over a FLP
6.01. Benefits of the Wyoming Close LLC
The Wyoming Close LLC statutes do not terminate the Company upon the
withdrawal, death or bankruptcy of a manager, so there is no need to create a
separate entity to serve as the manager.
The manager of the Wyoming Close LLC is afforded greatly enhanced creditor
protection, making it so that a separate entity need not be formed in order to
provide the manager with creditor protection.
By virtue of the fact that Wyoming Close LLC requires the formation of only one
entity, only one Form 1065 (Partnership Income and Deduction Return) needs to
be filed with the Internal Revenue Service.
Since the Wyoming Close LLC can operate without a separate manager entity, the
Company only needs to keep a minimum of one bank accounts, and accounting
The Wyoming Close LLC statutes contain greatly enhanced restrictions on the
withdrawal of a member, management rights of a member, and transfer rights of a
member, creating deep discounts for lack of marketability and control without
running afoul of the “excessive restriction” rules found in IRC § 2704.
6.02. Detriments of the Conventional FLP
Traditional limited partnerships require the termination of the company upon the
withdrawal, death or bankruptcy of the general partner, requiring that a separate
stand alone entity be created to avoid such termination.
Traditional limited partnerships do not afford any creditor protection to the
general partner, so a separate stand alone entity must be created to provide the
general partner with any meaningful creditor protection.
Due to the fact that a conventional limited partnership requires a stand alone
general partner entity, a Form 1065 (Partnership Income and Deduction Return)
needs to be filed with Internal Revenue Service for both the limited partnership
and the general partner entity.
As a result of the fact that the traditional limited partnership requires a separate
stand alone general partner entity, the client must keep a minimum or two bank
accounts and accounting records to service both entities.
Most state limited partnership statutes do not contain sufficient restrictions on the
withdrawal, management, and transfer rights of a limited partner to justify
significant discounting without running afoul of the excessive restriction” rules
found in IRC § 2704.
6.03. The Traditional FLP/General Partner Entity Two Step
The key problem associated with the conventional FLP and stand-alone general partner entity is
that the client will have to keep track of two different hats: the one hat pertaining to their control
of the general partner entity; and the other hat pertaining to the general partner entity‟s control
over the limited partnership. The failure to recognize and adhere to these different roles can
severely compromise the effectiveness of the family limited partnership. Some of the key
elements associated with the interplay between the general partner entity and the family limited
partnership are as follows:
a. The client must maintain a separate set of books and corporate records for both
the general partner entity and the family limited partnership;
b. The client must apply for separate taxpayer identification numbers for both the
general partner entity and the family limited partnership;
c. The client must maintain separate bank accounts and bookkeeping records for
both the general partner entity and the family limited partnership;
d. The client must recognize that when executing documents on behalf of the family
limited partnership that they are doing so in their capacity as managers of the entity
which serves as the general partner of the partnership;
e. Any management fees taken by the client must be first paid to the general partner
entity, and then from the general partner entity to the client as the member and/or
f. Any pro-rata distributions made by the partnership must also be made to the
general partner entity, which would then in turn pass on those distributions to the client
who is the member and/or manager of the general partner entity.