Understanding the Tax Structure of LLCs, Limited Partnerships, and the Bridge Trust

A common question we receive after an asset protection plan is implemented is:

“How do these entities work together from a tax standpoint, and what actually gets filed each year?”

This article explains how LLCs, Asset Management Limited Partnerships (LPs), and the Bridge Trust are typically structured in our planning, how they are treated for tax purposes, and how annual tax reporting flows through the structure.

The Typical Structure We Use

In most of our asset protection plans, ownership is intentionally layered as follows:

• One or more LLC which holds assets like real estate, boats, exotic car collections, etc
• Generally, each LLC is 100% owned by a Limited Partnership
• The Limited Partnership has multiple partners:
  • The Bridge Trust typically holds the majority Limited Partner interest
  • A small General Partner interest is held by an individual or GP entity for management and control

This structure is designed to:

• Centralize ownership and tax reporting
• Preserve strong liability protection
• Separate control from beneficial ownership
• Allow the Bridge Trust to serve as the long-term protective owner of the assets

How the LLCs Are Treated for Tax Purposes

LLCs Owned 100% by the LP

When an LLC is owned entirely by the Limited Partnership, it is treated as a disregarded entity for federal income tax purposes.

Practically speaking:

• The LLC does not file a separate federal income tax return
• The LLC does not issue K-1s
• All income, expenses, depreciation, and deductions of the LLC are reported by the Limited Partnership

The LLC exists primarily for liability segregation and asset isolation, not separate taxation.

How the Limited Partnership Is Taxed

The LP as the Central Tax Reporting Entity

Because the Limited Partnership has multiple partners, it is treated as a pass-through partnership for tax purposes.

This means:

• The LP files an annual Form 1065 (U.S. Partnership Return)
• The LP itself does not pay income tax
• All taxable activity from the underlying LLCs is reported at the LP level

The LP acts as the tax aggregation point for the entire structure.

The Role of the Bridge Trust in the Tax Structure

Bridge Trust as Majority Limited Partner

In most structures, the Bridge Trust holds the majority Limited Partner interest in the Limited Partnership.

From a tax standpoint:

• The Bridge Trust is treated like any other partner
• It receives a Schedule K-1 reflecting its allocable share of income, losses, and deductions
• Because the Bridge Trust is typically structured as a grantor trust, the income reported on its K-1 is generally reported on the grantor’s personal tax return

Importantly:

• The Bridge Trust does not change how the LP is taxed
• It does not create an additional layer of taxation
• Its role is ownership and asset protection, not tax manipulation

Although a grantor trust is not required to file a Form 1041 in many cases, we often recommend that the Bridge Trust file a Form 1041 with an attached grantor trust statement as a best practice.

Filing a 1041 with a grantor statement can:

• Create a clear IRS reporting record showing that the trust exists and is active

• Tie the trust’s EIN to the income reported on the grantor’s personal return

• Reduce confusion when third parties (banks, CPAs, or the IRS) see K-1s issued to the trust

• Provide continuity if the trust later transitions out of full grantor status

Under this approach:

• The Form 1041 itself reports no taxable income

• A grantor statement is attached allocating all income, deductions, and credits to the grantor

• The grantor reports that information directly on their personal return

• This filing is typically informational and protective, not tax-increasing.

Coordination With the Client’s Accountant

Whether to file a Form 1041 with a grantor statement is ultimately a tax reporting decision and should be confirmed with the client’s accountant. Some CPAs prefer this approach for clarity and audit defensibility, while others may rely solely on grantor reporting without a 1041.

Schedule K-1s: How Income Flows Through the Structure

Each year, after the LP’s tax return is prepared:

• The LP issues a Schedule K-1 to each partner, including:
  • The Bridge Trust (as Limited Partner)
  • Any General Partner entity or individual
• Each partner reports their K-1 information on their own tax return

There is no additional federal income tax filing at the LLC level.

State and Local Tax Considerations

While the federal tax treatment described above applies nationwide, state and local rules may differ.

Depending on the state(s) where:

• The entities are formed
• The property or business activity is located
• The owners or trustees reside

there may be additional requirements, such as:

• State partnership or LLC tax returns
• Franchise or minimum taxes
• Annual reports or information filings
• State-level K-1 equivalents

Because these rules vary by jurisdiction and can change over time, clients should always confirm state-specific filing and tax obligations with their accountant or tax advisor.

Lodmell & Lodmell, PC is one of the nations leading Asset Protection Law Firms and the creators of The Bridge Trust®.  L&L serves clients nationwide and may be reached at [e-mail] or 602-230-2014.