Is your FLP/LLC audit ready? An IRS audit of an estate owning an LLC asked for the following items: List of all owners since inception (legal documents should support any member joining/leaving the LLC, more owners may support the business purpose of the LLC).
Distributions to owners since inception (pro-rata distributions demonstrate respect for the LLC form; too many distributions or distributions tracking personal expenses of the owners make the entity look superfluous).
Who suggested the entity be formed (you want more than just tax reasons)?
Was the creation of the LLC a matter of negotiation (trusts with independent trustees with fiduciary obligations as members, or non-family members, or a charity as a member, may give more credibility then just mom and dad as members)?
When were assets transferred to the entity (the more time between transfer and death the better)?
What was the descendant's age and health when the LLC was formed (the younger and healthier the better; get a copy of a recent medical report on those setting up the LLC to show that the LLC wasn't set up in anticipation of death)?
Were transfers made under a power of attorney (its better for the parent to sign assignment documents themselves then under a POA)?
Copies of all LLC records (if it's a real business entity it should have records. Regular Quicken reports are a good thing). Minutes of LLC meetings (although not required by law, since the IRS asks for them, have meetings and sign minutes corroborating who attended and what was discussed).
How, when and by whom were LLC assets acquired and used (personal use assets, such as a parent's home, never belong in an LLC)?
How were assets managed before contribution to the LLC and after (to avoid the IRS argument that assets were merely "recycled", there should be a change in management responsibility after contribution that you can demonstrate)?
There are pages more of questions by the IRS on the audit, but you should get the drift. Be a Boy Scout and "Be Prepared" for your FLP/LLC audit.
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