USA – ARKANSAS Law and Practice Contributed by: Aaron Bundy and Danya Bundy, Bundy
ment from inception, since the IRS treats adding one by later modification as a gift by the consenting ben - eficiaries.
voting control in the senior generation and progressive transfers of nonvoting interests by gift or instalment sale to trusts for the next generation. Grantor-retained annuity trusts and sales to grantor trusts move appre - ciation out of the estate at little or no gift tax cost, and appraised discounts on minority interests improve the arithmetic. Buy-sell agreements with realistic valua - tion mechanics keep equity in the family and create liquidity at death, but the funding structure now needs a second look. In Connelly v United States , the US Supreme Court held that insurance proceeds a com - pany will use to redeem a deceased owner’s shares increase the company’s estate tax value with no offset for the redemption obligation, so redemption agree - ments funded with company-owned insurance can manufacture estate tax. Cross-purchase structures avoid the trap, and existing redemption agreements in taxable estates deserve review now. Governance prevents more litigation than tax planning does. Operating and shareholder agreements should cover employment, distributions, transfer restrictions, and exits, and larger families benefit from family coun - cils or written family constitutions that separate own - ership questions from management questions. Where one child farms and three do not, forcing them into co-ownership is a plan for conflict; the better design equalises the others with insurance or non-farm assets and uses leases and rights of first refusal to keep the operator on the land. For farm and timber holdings, a family limited liability company with clear manage - ment succession keeps the property intact through generational turnover. 4.3 Transfer of Partial Interest Federal transfer tax valuation applies the willing buyer and willing seller standard, and the value of a partial interest in a closely held entity is routinely adjusted for lack of control and lack of marketability. The discounts are established by qualified appraisal and depend on the governing documents, the size of the interest, the rights attached to it, and the character of the underly - ing assets, with farmland and timber entities regularly supporting meaningful combined discounts. The IRS scrutinises aggressive discounting, and its preferred weapon is no longer the discount itself but retained enjoyment. In the Fields case, affirmed on appeal in June 2026, a deathbed family partnership was pulled
4. Family Business Planning 4.1 Asset Protection
Exemptions come first. The Arkansas Constitution protects the homestead in Article 9, and the floors are what matter in practice: a rural homestead of up to 80 acres and an urban homestead of up to one- quarter acre are protected regardless of value. Ten - ancy by the entirety is recognised in both real and personal property, so assets held by spouses as an entirety estate are beyond the reach of creditors of one spouse alone, a simple and underused protection for married couples. Qualified retirement plans enjoy substantial protection, and life insurance and annuity exemptions add another layer. For business and investment assets, limited liability companies formed under the state’s Uniform Limited Liability Company Act give charging order protec - tion under Section 4-38-503 of the Arkansas Code Annotated, rewritten in 2023. For a multi-member company, the charging order is the exclusive remedy, and a creditor can foreclose the lien only by proving that the members manipulated operations or distri - butions in bad faith to starve the debtor’s interest. A single-member company is a different animal, since the statute permits outright foreclosure and the pur - chaser becomes the member, so interests that matter should have more than one genuine member. Third-party spendthrift trusts protect inheritances from beneficiaries’ creditors under the Trust Code, and the self-settled option now exists in statute. The limits are conventional. Transfers that hinder existing creditors are voidable under fraudulent transfer law, and Arkansas courts have long allowed child support and alimony claimants through spendthrift protection as a matter of case law. Protection works when built early as structure, not late as reaction. 4.2 Succession Planning The recurring architecture is a recapitalisation into voting and nonvoting interests, followed by retained
708 CHAMBERS.COM
Powered by FlippingBook