Use of LLCs in Estate Planning & Small Business Planning
Limited liability companies (“LLCs”) offer a flexible vehicle for families and small business owners to facilitate the transfer of property among family members and to manage property within families over many generations.
An LLC is a corporation established under state law that offers the flexibility of a partnership form, including an option to elect “pass through” taxation of income to members and less formal governance requirements than are applicable to corporations. They also allow ownership and management to be bifurcated so that either some (rather than all) members are involved in day-to-day management or professional managers are hired to handle day-to-day affairs, but controlled by some or all of the members.
Any property that generates income (or is held for investment purposes) is a likely candidate for an LLC. For example, property with mineral rights, vacation homes, and rental properties can be held in an LLC while giving multiple owners (family members) a right to income generated from the properties and various degrees of control over the management of the entity. What makes these so special?
- Membership interests in an LLC are considered intangible personal property and can be transferred to heirs without the necessity of ancillary probate proceedings- even if the LLC is located in a state other than the one in which the member resided in at his or her death and even if the LLC owns real property located in multiple states. In contrast, if a decedent owned real property in multiple states outright, then transfer of that property to his or her heirs following death would necessitate ancillary probate proceedings in each state in which the property is located. Thus, transfer of such property to an LLC and then transfer of the membership to heirs at death, provides a more efficient and less expensive method of transferring multi-state property to heirs.
- LLCs provide protection against claims of third party creditors of the LLC. Outright ownership, in contrast, exposes the owners to potential loss of personal assets in settlement of creditor claims
- In addition to state law protections, the operating agreement may be structured in such a way as to protect against creditors of the owners of the LLC from assuming management of the LLC for the purpose of its liquidation.
- LLCs provide a means to share ownership of property for the purpose of maximizing the value of that property, e.g., in negotiating the highest price and best terms in contracts with vendors, lessees or buyers.
- The LLC operating agreement can provide for orderly transfer of interests among family members over several generations and impose hurdles on the transfer of interests to non-family members.
- Parents can retain control over the management of the properties for a period of time to ensure business continuity. Note, however, for taxable estates, there are many issues that need to be addressed to ensure the Parent does not have a “retained interest” under various sections of the Internal Revenue Code.
- Parents can transfer ownership interests to their children using discounts and/or the annual gift tax exclusion (currently $14,000) to reduce parent’s estate for Federal Estate Taxes purposes.
LLC operating agreements are highly manuscripted to respond to the needs and desires of particular family members and business owners. They also need to be drafted carefully to avoid certain tax and regulatory issues and take advantage of the myriad opportunities they offer.
Mathieu, Ranum & Allaire, PLLC is a boutique law firm with offices in Boise and Sun Valley, Idaho focusing exclusively in the areas of estate and trust planning, probate and trust administration, asset protection, business law and charitable organization laws. We represent individuals, families, trustees, heirs and beneficiaries, entrepreneurs and closely held businesses, tax-exempt organizations, and family offices, as well as professionals and business owners potentially exposed to future creditor claims.