Should I Create an LLC for Estate Planning?
If you want to transfer assets to your children, grandchildren or other family members but are worried about the weight of estate taxes your beneficiaries will owe upon your death, a LLC can help you control and protect assets during your lifetime, keep assets in the family and lessen taxes owed by you or your family members.
Investopedia’s article entitled “Using an LLC for Estate Planning” explains that a LLC is a legal entity in which its owners (called members) are protected from personal liability in case of debt, lawsuit, or other claims. This shields a member’s personal assets, like a home, automobile, personal bank account or investments.
Creating a family LLC with your children lets you effectively reduce the estate taxes your children would be required to pay on their inheritance. A LLC also lets you distribute that inheritance to your children during your lifetime. While this distribution may be a gift and may exceed the $15, 000 gift tax exclusion, generally, you would only be required to file a gift tax return which would reduce your federal lifetime gift and estate tax exclusion amount that is currently at $$11.58 million. This means that you can give up to $11.58 million in gifts over the course of your lifetime without ever having to pay gift tax on it. For married couples, each spouses get the $11.58 million exemption. You can also have the ability to maintain control over your assets during your life.
In a family LLC, the parents maintain management of the LLC, and the children or grandchildren hold shares in the LLC’s assets. However, they don’t have management or voting rights. This lets the parents purchase, sell, trade, or distribute the LLC’s assets, while the other members are restricted in their ability to sell their LLC shares, withdraw from the company, or transfer their membership in the company. Therefore, the parents keep control over the assets and can protect them from financial decisions made by younger members.
As far as tax benefits, if you’re the manager of the LLC, and your children are non-managing members, the value of units transferred to them can be discounted quite steeply—frequently up to 40% of their market value—based on the fact that without management rights, LLC units become less marketable.
Your children get an advance on their inheritance, but at a lower tax burden. The overall value of your estate is reduced, which means that there is an eventual lower estate tax when you die. The ability to discount the value of units transferred to your children, also permits you to give them gifts of discounted LLC units. That lets you to gift beyond the current $15, 000 gift limit, without having to potentially pay a federal gift tax in the event that you have gifted above your exemption level. In Massachusetts, there is no gift tax.
You can give significant gifts without gift taxes, and at the same time reduce the value of your estate and lower the eventual estate tax your heirs will face.
Speak to an experienced estate planning attorney about a family LLC, since estate planning is already complex. LLC planning can be even more complex and subject you to heightened IRS scrutiny. The regulations governing LLCs vary from state to state and evolve over time. In short, a family LLC is certainly not for everyone and it appropriately should be vetted thoroughly before creating one.
Reference: Investopedia (Oct. 25, 2019) “Using an LLC for Estate Planning”