Estate planning is a vital part of looking after your family. After all, the goal of planning your estate is to make things smoother for them following your exit from their lives. But estate planning is made up of many different components.
One of those components that can be incredibly beneficial to your family is a family LLC. Doing so can provide a reduction in certain taxes, a different way of distributing inheritance, and better control over your assets.
We’re going to dive into just what exactly a family LLC is, what makes them so powerful as a part of your estate planning, what can be transferred into one, when they dissolve, and what steps you should take if you think a family LLC is right for you.
What Is a Family LLC?
First off, what is an LLC?
An LLC is a type of legal entity. It has members like a corporation and these members, the owners of the LLC, gain protection from personal liability in certain situations such as debts and lawsuits.
With a family LLC, you, as parents, would manage the LLC while your children hold shares. This could also include your grandchildren, too, of course. But while the children hold shares, they do not have voting rights or management rights.
This means that you, the parents, would be the sole members with the ability to buy, trade, or distribute the LLC’s assets. Your child, while still members, would have certain restrictions placed on their ability to sell shares or to withdraw assets from the LLC. Essentially, you can ensure that your children are able to benefit from the LLC but they lack the ability to damage it by making the sort of brash decisions we all did when we were younger.
After setting up your LLC, you would go about transferring assets into it. But those assets then need to be turned into LLC units of value based on their market value. These units function in a similar fashion to how a corporation uses stocks. Ownership of the LLC units can be given to your children at your discretion.
Why Is a Family LLC So Powerful?
A family LLC is a powerful tool for two primary reasons. The first is that it helps you to reduce your estate tax. Basically, you are able to give your children an advance on their inheritance through the family LLC by transferring them LLC units of value.
This transfer allows your children to receive their inheritance but it will result in a lower tax burden compared to what they would have to pay on their personal income taxes. This also means that the value of your estate goes down and while this may sound bad it actually means that there will be less estate tax to be paid when you pass.
Another one of the benefits that make a family LLC so powerful is that it allows you to gift your children more. When you are the manager for an LLC and your children are non-managing members, you can apply a discount to the value of the units you transfer to them. In some cases, this discount can be as high as 40%.
This means that you can actually gift your children more through a family LLC than you could otherwise. There is a gift limit of $16,000 in a given year before you would have to pay gift tax. But if you discount units of the LLC then you can go beyond this. Assuming you have shares worth $1000 that are reduced by 20% or 40% then you would be able to gift more. You could transfer roughly 19 $1000 units at 20% discount or roughly 25 $1000 units at a 40% discount.
This means that you have the ability to gift much more away. Your children will receive more, which they will appreciate, but gifting away assets of the estate reduces the value. So you are able to gift more and therefore lower your estate taxes more by creating a family LLC.
What Can Transfer Into an LLC and When Does it Dissolve?
You can pretty much transfer any asset into an LLC that you would want to pass along to your children. Cash could be transferred into the LLC from a personal bank account if you wanted. Or you could transfer in property that you wanted to pass along by transferring the title to the land or buildings to the LLC.
Another valuable thing that you can do with an LLC is transfer personal property into it. So if you want your children to inherit a particular car, piece of artwork, precious stones and metals, stocks, or other belongings then you can do so.
When the owner of an LLC dies, in some states it is necessary for the LLC to dissolve. Unless, however, they specifically included a plan as to how succession was to be handled as part of the LLC. So you can start a family LLC when your children are younger but set it up to transfer to one of them upon your death, a point when they would be older and more responsible.
There is one downside to an LLC that should be addressed. It can be fairly expensive to start and maintain an LLC. However, this cost can absolutely be worth it considering how much it can help you to avoid larger costs down the road.
What Should I Do If I Think a Family LLC is Right for Me?
Starting a family LLC is a complicated bit of business. For the best results, you should speak to an attorney that has worked with family LLCs before. They will be able to look at your current situation and help you determine whether or not a family LLC is actually right for you.
If it is then they can help you with all the paperwork and processes that must be completed in order to start one. From there, they can serve as an advisor on any issues that arise and offer you suggestions on how to best benefit from your family LLC.