Using an LLC for estate planning


Somewhere between a company and one Partnership is the limited liability company (LLC). This hybrid legal entity is advantageous for small business owners and is also a powerful tool for estate planning.

If you want to transfer assets to your children, grandchildren, or other family members, but are concerned about gift tax or inheritance tax burden, your beneficiaries you will owe on your death – an LLC can help you control and protect your assets while you are alive, conserve family assets, and reduce taxes owed by you or your family members.

Key points to remember

  • A limited liability company (LLC) can be a useful legal structure for passing assets on to your loved ones while avoiding or minimizing inheritance and gift taxes.
  • A family SARL allows your heirs to become shareholders who can then benefit from the assets held by the SARL, while retaining management control.
  • The tax advantage of the LLC is that the value of the shares transferred to heirs can be discounted quite sharply, often up to 40% of their market value.
  • Just about any asset can be put into an LLC.

What is an LLC?

An LLC is a recognized legal entity in all 50 states, although each state has its own regulations governing the formation, operation, and taxation of such corporations. Like a corporation, LLC owners (called members) are protected from personal liability in the event of debt, lawsuit, or other claims, thereby protecting personal property such as a home, automobile, personal bank account, or an investment.

Unlike a corporation, LLC members can run the LLC any way they want and are subject to fewer state regulations and formalities than a corporation. As a partnership, the members of an LLC report the profits and losses of the business to their personal account. tax returns, instead of the LLC itself being taxed as a business entity.

Benefits of using an LLC for estate planning

You’ve worked hard to earn and grow your fortune, and you probably want to keep as many of them as possible in your family once you’re gone. Creating a family LLC with your children allows you to:

  • Effectively reduce the property taxes your children would be required to pay on their inheritance
  • Distribute this inheritance to your children, during your lifetime, without being affected as much by the gift tax
  • Keep control over your assets

In short, it can be a win-win for you and your kids. If you’re trying to avoid inheritance taxes, it’s important to note that starting in 2021, the dreaded 40% federal inheritance tax only takes effect if an individual’s estate is assessed at more than of $ 11.7 million. For 2022, the number is $ 12.06 million. Estates with a value less than this amount are considered tax exempt.

Taxes on donations, however, will take effect after transferring $ 15,000 (rising to $ 16,000 in 2022) in a single year if the donor is not married (married couples can together donate $ 30,000, increasing to $ 32,000 in 2022). This total is reset each year and taxes are payable by the person giving rather than the person receiving the gift. This limit applies per beneficiary, so giving $ 15,000 to each of your three children and five grandchildren would not incur donation tax.

Also, keep in mind that if you exceed the annual donation tax exclusion limit of $ 15,000 per year, there is a lifetime limit of $ 11.7 million in 2021. After that , the tax on donations increases to 40%. Before you reach the limit, each amount donated over the $ 15,000 limit is deducted from your lifetime limit, bringing you closer to the 40% tax rate. In view of this, the benefits of transferring wealth between family members with the use of an LLC become more evident.

Family limited liability companies

In a family SARL, the parents retain the management of the SARL, the children or grandchildren holding shares in the assets of the SARL, but not having management or right to vote. This allows parents to buy, sell, trade, or distribute the assets of the LLC, while other members are limited in their ability to sell their LLC shares, exit the company, or transfer their assets. membership in society.

In this way, parents maintain control over assets and can protect everyone from financial decisions made by younger children. Donations of shares to younger members are subject to gift tax, but with significant tax advantages that allow you to give more and reduce the value of your estate.

How a family LLC works

After you have created your family LLC according to your state’s legal process, you can begin transferring assets. You then decide how to translate the market value of these assets in LLC units of value, similar to Stock in a society. You can now transfer the ownership of your LLC units to your children or grandchildren, as you wish.

The discount on the value of shares transferred to non-executive members of an LLC is based on the fact that without management rights, the shares of the LLC become less tradable.

Here is where the fiscal advantages really come into play: If you are the manager of the LLC and your children are non-manager members, the value of the units transferred to them can be greatly reduced, often up to 40% of their market value.

Lower property tax

Your offspring can now receive an advance on their inheritance, but at a lower tax rate than they would otherwise have had to pay on their personal property income taxes, and the overall value of your estate is reduced, resulting in a possible reduction in inheritance tax upon your death.

The ability to reduce the value of units transferred to your children also allows you to offer them LLC units at a reduced price, exceeding the current limit of $ 15,000 without having to pay a donation tax.

If, for example, you would like to donate to one of your children non-manager shares of LLC units valued at $ 1,000 each, you can apply a 40% value discount (reducing the value of each unit at $ 600). Now, instead of transferring 15 shares before having to pay a gift tax, you can transfer 25 shares.

This way, you can make large gifts without gift tax, while reducing the value of your estate and lowering potential estate tax on your estate. heirs will face.

What Can I Transfer to an LLC?

You can transfer just about any asset into an LLC and then pass those assets on to your children and grandchildren. Typical assets are:

  • Cash: You can transfer money from your personal bank accounts to the LLC and then distribute it among the members of the LLC.
  • Ownership: You can transfer title to the land and structures built on that land into your LLC. Check with any mortgage holder before such a transfer, as you may need their approval.
  • Personal property: You can transfer the ownership of automobiles, stocks, precious metals, artwork, or other significant assets in your LLC.

How does an LLC pass on death?

When the owner of an LLC dies, some states state that the LLC must dissolve unless a specific succession plan has been developed. However, dissolution can be avoided by providing for a transfer to another person in the event of death detailed in the operating agreement, creating a joint membership, creating a revocable trust to hold the membership in the LLC, or making probate the LLC through the court to determine the estate plan.

What are some of the disadvantages of an LLC?

Compared to a sole proprietorship, an LLC is more expensive to set up and maintain. Depending on the state, an LLC generally requires formation fees and various ongoing fees to maintain the LLC. Sole proprietorships generally do not require registration and, therefore, the associated fees.

Is the owner of an LLC responsible for the debts of the LLC?

No, the owner of an LLC is not responsible for the debts of the business, which is one of the main advantages of an LLC. An LLC provides protection to the owner from creditors in the event the business defaults, goes bankrupt, or cannot meet its obligations. Creditors are not allowed to recover personal property from the owner.

The bottom line

A family LLC is a powerful tool for managing your assets and passing them on to your children. You can maintain control of your estate by appointing yourself as the manager of the LLC while providing significant tax benefits to yourself and your children.

Since estate planning is very complex and the regulations governing LLCs vary from state to state and change over time, always check with a Financial Advisor before formalizing your LLC plan.

You will also need legal assistance to create the LLC. You will also need to pay upfront and annual fees. Take all of these costs into account in your planning and in your decision as to the suitability of this type of structure for your estate.


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