Considerations for Including a Family LLC in an Estate Plan

Last updated on: May 2, 2024

There is a structural difference between a partnership and a corporation when it comes to limited liability companies (LLCs). It is well known that this hybrid entity is beneficial for financial management, but an LLC can also be used as a powerful estate planning tool for similar reasons. As a result of estate planning, a Family LLC enables asset transfers without the heavy burden of gift or estate taxes to be done at discounted rates to children, grandchildren, and other family members. In addition to protecting assets during your lifetime and keeping them in the family, an LLC can lower taxes you and your family will owe. Before you make any decisions, speak with a qualified Houston estate planning attorney from The Law Office of Whitney L. Thompson, PLLC. Contact us at (281) 214-0173 to schedule a consultation.

Why Do I Need a Family LLC?

All fifty states recognize a Family LLC as a legal entity, although each state has regulations governing its formation, running, and taxation. LLC owners (members) receive protection from personal liability in the event of lawsuits, debt, or other claims. This protection shelters personal property like a home, bank account, investments, and even vehicles. An LLC is subject to fewer state formalities and regulations than a corporation, so members can manage in nearly whatever manner they prefer.

A financial threshold defines the need for an LLC to help lower estate taxes if the estate is more than $12.06 million in 2022. If your estate is below this threshold, your estate planning attorney can help craft an estate plan that focuses on trusts to limit the probate process and estate taxes. While there is no legal reason you cannot create an LLC with fewer means, a trust will not require Family LLC’s initial and annual fees and more intensive reporting procedures.

Establishing an LLC in conjunction with your children permits you to:

  • Maintain control over your assets while alive
  • Effectively reduce estate taxes due to your children upon inheritance
  • Distribute inheritance to your children with less gift tax during your lifetime

How is a Family LLC Structured?

A Family LLC is managed by the parents. The children or grandchildren hold shares in the LLC’s assets without management or voting rights. The parents can distribute, buy, sell, or trade the LLC’s assets but other members have restrictions regarding the sale of LLC shares, company withdrawal, or membership transfer. While gifting shares to younger members come under the gift tax, significant benefits permit you to gift more while lowering the tax value of your estate.

Upon establishing a family LLC following your state’s legal process, you can transfer assets into the LLC. The management will decide how best to translate the market value of these assets into LLC units of value in much the same manner as stock in a corporation. You are now ready to transfer ownership of LLC units to your children or grandchildren as you desire. 

The value of units transferred to non-managing members becomes discounted because the LLC units become less marketable without management rights which is where tax benefits come into play. The manager of the LLC can often reduce the value of transferred units by as much as forty percent of their market value. In essence, non-managing members may receive an inheritance advance at a lower tax burden than otherwise due to their personal income taxes. Additionally, the overall value of your estate is reduced, lowering estate tax when you die.

What is Transferred to a Family LLC?

You can transfer almost any asset into a family LLC, but typically they include:

  • Property – Titles to land and structures built on that land are transferable; however, check with any mortgage holder before such a transfer if you need their approval.
  • Cash – It is permissible to transfer money from personal bank accounts into the LLC and distribute it among members.
  • Personal possessions – You may transfer ownership of stocks, precious metals, automobiles, boats, jewelry, artwork, or other significant collections or belongings into the family LLC.

Upon the death of an LLC owner, some states require the dissolution of the LLC if there is no specific succession plan. A transfer to another individual upon death as defined in the operating agreement creates a joint tenancy membership, avoiding the LLC’s dissolution. This transfer builds a revocable trust to hold the LLC membership or a probate process if the LLC goes through court to determine a succession plan.

Assets Transferable to a Family LLC Description
Property Titles to land and structures built on that land are transferable, subject to approval from mortgage holders if necessary.
Cash Money from personal bank accounts can be transferred into the LLC and distributed among members.
Personal Possessions Ownership of stocks, precious metals, automobiles, boats, jewelry, artwork, or other significant collections or belongings can be transferred into the family LLC.

Does an LLC Go Through Probate?

A limited liability company (LLC) is a business structure that provides its members with limited liability protection and pass-through taxation, meaning the company itself is not taxed, but profits and losses are reported on the members’ personal tax returns. When it comes to probate, which is the legal process of distributing a deceased person’s assets, an LLC as an entity typically does not go through probate because it is considered a separate legal entity.

However, ownership interest in the LLC may be subject to probate under certain circumstances. If an LLC owner or member dies without an estate plan that includes provisions for their LLC interest, or if there is no operating agreement detailing the transfer of ownership upon death, that interest may go through probate.

To avoid probate of an LLC interest, LLC members can employ several strategies. These include creating a comprehensive estate plan, having a well-drafted LLC operating agreement that includes succession provisions, and establishing buy-sell agreements. These strategies can facilitate the smooth transfer of ownership interests to designated beneficiaries or remaining members, thereby bypassing the probate process.

It is crucial for LLC members to seek legal advice from a Houston estate planning attorney to establish the necessary documentation, ensuring that their interests are transferred according to their wishes without the need for probate. Contact The Law Office of Whitney L. Thompson, PLLC today to schedule a consultation.

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Advantages of Having a Family LLC in Estate Planning

You may have to pay a significant amount of estate tax upon your death if your estate is valued above the federal estate tax exemption. In 2021, this value is $11.7 million. However, by using a family LLC to transfer your business to your heirs, you may be able to avoid paying the said tax. 

The family LLC can help an owner lower their estate value below the threshold for owning federal estate taxes. One way that a family LLC can make this happen is by having the IRS help out by allowing discounts. Normally, people would want their assets to be valued at their maximum value. However, in the case of having an LLC, having less can mean better things. These discounts are meant to recognize that investors are usually not interested in family-owned businesses. With these discounts, it is possible for the owner of the estate to reach the threshold slower compared to when they move their assets at their actual values. This means that a family LLC will allow you to transfer more assets before your estate tax threshold is reached.

Family LLCs can also protect your family legacy, so you can ensure that the family business continues to be family-owned. A family LLC can also be used to limit who is allowed to transfer interests outside of family members.

Asset Protection with Your Family LLC

The key benefit of a business LLC is that the owner is not liable for the company’s debts. The Family LLC also provides the heirs’ protection from creditors in the event of a parent’s default, bankruptcy, or other family obligations. It is not permissible for creditors to go after these assets.

A Family LLC can be a powerful tool to manage your assets and pass them to your heirs. You can maintain control over your estate as an LLC manager while providing significant tax benefits to you and your children. Creating a Family LLC for estate planning purposes is complex and requires legal guidance from an experienced estate planning attorney and a financial advisor before formalizing your LLC plan. Contact The Law Office of Whitney L. Thompson, PLLC at our Houston office at (281) 214-0173 or our Bay City office at (979) 318-5079 today to schedule an appointment and discuss how we can assist you with your legal matters.

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