The Family LLC is just a regular limited liability company, that usually involves the parents first creating  the company with themselves as the initial members. Then, the LLC is typically funded with assets, such as real estate holdings and liquid assets.  The LLC's operating agreement would then name the parents as the managers, giving them total control.

The operating agreement might contain a provision that no distributions of cash could be made to any member without approval of the managers, and no member can withdraw any portion of his or her capital account without the managers approval.  Then, it would state that the death, voluntary resignation or vote of a supermajority of membership would be the only grounds for removal of the managers.

Once organized and funded, the parents can make Annual Exclusion Gifts to the children by gifting their membership interest to them.  The value of these gifts would be determined using reasonably aggressive discounts for lack of liquidity and the limitations of a minority interest.  If these gifts qualify for the Annual Exclusion Gift Tax Exclusion, the first $11,000 - or $22,000 if the gift is made by the couple - would be gift tax free and thus would not use up the donor's lifetime gift exemption.

In a 2002 tax case, Hackl v. Commissioner of Internal Revenue, a wealthy family did just that.  However the IRS assessed gift tax liability for the gifts, claiming that the did not qualify for the annual exclusions.  The basis for this decision was that that the IRS claimed that the strict operating agreement prevented the children from having any access to the financial or economic benefits of the gift, and thus it wasn't really a gift at all.  The court ruled that - essentially - just because the gift occurred on paper does not mean that it occurred in substance.

So, how do we approach using a Family LLC under the light of this legal precedent? There are still several options:

1. Allow the members to receive current income distributions to its members so they can receive the "economic benefit" of the gift.
2. The donor can create an irrevocable trust for the benefit of all the gift recipients, with the trusts structured to be intentionally defective grantor trusts.  Then, the donor funds the trust with cash equivalent to the discounted value of the LLC gift.  If Crummey notices are properly given to the beneficiaries, the gifts will qualify for the annual exclusion.  Then, the trustee uses the cash to purchase the LLC interest at the discounted value.