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 your children and grandchildren after your passing.
One estate planning tool that can be incredibly beneficial is a family LLC, or family limited liability company. A family LLC is a different way of distributing inheritance to your heirs, and can provide better control over your assets.
In this article, we’ll define a family LLC, what makes them so powerful as part of your overall estate planning, which assets can be transferred into one – and what steps to take next if you think a family LLC is right for you.
LLCs, a Powerful Estate Planning Tool
A Family LLC is an estate planning tool that provides numerous benefits and protections. Like a corporation, it has members, and these members – the owners of the LLC, gain specific protections from personal liability in situations like debt collections and lawsuits.
With a family LLC, you – as parents – would manage the LLC while your children hold shares. (This may also include your grandchildren.) But while your children hold shares, they do not have voting rights or management rights. This means that you are the sole members with the ability to buy, trade or distribute the family LLC’s assets. Your children, while still members of the family LLC, have restrictions on their ability to sell shares or withdraw assets. Essentially, this ensures that your children can benefit from the LLC, but limits their ability to potentially damage it through unwise or hasty decisions.
After establishing your LLC, you would transfer your assets into it. These assets are then turned into LLC units of value, based on their current market value. These LLC units function in a similar fashion to corporate stocks. Ownership of the LLC units can them be given to your children at your discretion.
What are the Benefits of a Family LLC?
A family LLC is a powerful estate planning tool for two key reasons. The first reason a family LLC is so beneficial is in reducing any potential estate taxes that your heirs would have to pay. With a family LLC, you are providing your children with an advance on their inheritance by transferring LLC units of value to them.
This transfer of value via the LLC units allows your beneficiaries to receive their inheritance, but with a lower tax burden compared to what they would have to pay on their personal income taxes. Another benefit to a family LLC is that it reduces the value of your estate. While this sounds bad, it’s not – it actually means that your heirs will pay less in estate taxes when the time comes.
With a family LLC, you can actually gift your children more before your passing than you would otherwise be able to. In current tax legislation, you can gift your child up to $16,000 per calendar year – but any additional financial gift would be subject to gift taxes. However, you can discount your LLC units to increase how much you can gift your children with, without accruing additional tax burden.
For example, you have family LLC shares worth $1000. You can reduce these by 20%, to gift more shares at a lower price. You could transfer roughly 19 $1000 shares at a 20% discount, or 25 $1000 shares at a 40% discount.
By gifting your shares this way, your children will receive more – and who doesn’t appreciate that? – while also reducing the overall value of your estate so there will be lower estate taxes to pay, eventually.
Which Assets Can I Transfer into a Family LLC?
With a family LLC, you can transfer assets of almost any type. This includes money from a personal bank account, or transferring the ownership of real estate property by transferring land or building titles to the family LLC. You can also transfer valuable personal property into an LLC. If you want your beneficiaries to inherit a particular car, piece of artwork, precious stones and metals, stocks or other belongings, this can also be handled via a family LLC.
When is a Family LLC dissolved?
In some states, when the owner of an LLC dies, the LLC must be dissolved unless the LLC owner included a succession plan. But you don’t need to wait until your children are older and more responsible to create a family LLC. You can start a family LLC even when they are young, but set it up to transfer only in the event of your death.
There is one disadvantage to LLCs that should be mentioned. A family LLC can be expensive to start and maintain, but can be worth the investment when you consider the significant tax benefits – and savings – they provide over the long term.
How Do I Set Up a Family LLC?
Setting up a family LLC is a complex process. To get the best outcome, you should speak with an experienced estate planning attorney. They’ll be able to look at your current estate plans and financial situation, and help you determine whether or not a family LLC is the right choice for you and your family. If it is, they’ll help you with the necessary paperwork and processes, serve as an advisor on any issues that arise, and offer recommendations on how to best benefit from your family LLC.
If you think a family LLC is the right estate planning tool for you, we’ll be happy to help. Contact the team at our Austin and Houston offices.