Somewhere between a group and a partnership lie limited liability company (LLC). This hybrid entity benefits small business owners and is also a powerful tool for estate planning.
If you want to transfer property to your children, grandchildren, or other family members—but you’re worried about gift taxes or your estate tax burden beneficiary will owe on your death—a limited liability company can help you control and protect your assets throughout your life, keep your family assets and reduce taxes you or your family members may owe you. you owe.
Pull out key
- A Limited Liability Company (LLC) can be a useful legal structure through which to transfer assets to your loved ones while avoiding or minimizing estate and gift taxes.
- A family limited liability company allows your heirs to become shareholders, who can then benefit from the assets held by the limited liability company, while you retain control manage.
- The tax benefit of an LLC is that the value of shares transferred to an heir can be discounted quite heavily, often up to 40% of their market value.
- Nearly any asset can be put into a limited liability company.
What is a limited liability company?
An LLC is a recognized legal entity in all 50 states, although each state has its own rules about forming, operating, and taxing these corporations. Like a corporation, LLC owners (called members) are protected from personal liability in the event of debt, litigation or other claims, thus protecting personal assets such as homes, cars, personal bank accounts or investments.
Unlike a corporation, members of an LLC can manage the LLC in any way they like and are subject to less state regulations and procedures than a corporation. As a partnership, the members of a limited liability company report the profits and losses of the business on their individual accounts. tax refundrather than 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 wealth, and you probably want as much as possible to stay with your family after you’re gone. Forming a family limited liability company with your children allows you to:
- Reduced efficiency property tax your children will be required to pay their inheritance
- Divide that inheritance among your children over your lifetime without being hit hard by gift taxes
- Maintain control of your assets
In short, it can be a win-win for you and your child. If you’re trying to avoid estate taxes, it’s important to note that as of 2022, federal estate taxes only take effect if an individual’s estate is worth more than $12.06 million la. For 2023, the figure is $12.92 million. Real estate worth less than this is considered tax-free.
gift taxhowever, will take effect after $16,000 (rising to $17,000 in 2023) is transferred in one year if the donor is unmarried (couples can donate $32,000 together, increasing to $34,000 in 2023). This total is reset each year and the person giving the gift instead of receiving the gift must pay tax. This limit applies to each recipient, so giving $16,000 to each of your three children and five grandchildren won’t be subject to gift tax.
Also, note that if you exceed the annual gift tax exclusion limit of $16,000 ($17,000 in 2023) per year, the lifetime limit is $12.06 million in 2022 ($12.92 million in 2023). Then the gift tax becomes 40%. Before you hit the limit, each amount over the $16,000 limit will be deducted from your lifetime limit, bringing you closer to the 40% tax rate. Considering this, the benefits of transferring assets between family members with using an LLC become clearer.
family limited liability company
In a family limited liability company, the parents maintain control of the limited liability company, with children or grandchildren holding shares in the assets of the limited liability company, but no management or voting rights. This allows parents to buy, sell, exchange, or distribute the LLC’s assets, while other members have limited ability to sell their LLC shares, withdraw from the company, or transfer membership. theirs in the company.
In this way, parents maintain control of the assets and can protect everyone from the financial decisions of younger members. Stock gifts to younger members are subject to a gift tax, but with significant tax benefits that allow you to give more, as well as reduce the value of your property.
How does a family limited liability company work?
Once you have established your family limited liability company in accordance with your state’s legal process, you can begin to transfer assets. Then you decide how to translate Market value of those assets into LLC units of value, similar to Share in a corporation. You can now transfer ownership of your LLC units to your children or grandchildren as you wish.
The reduction in the value of units transferred to non-managing members of the LLC is based on the fact that without management, LLC units would become less viable in the market.
This is where tax benefits It really works: If you’re the manager of the LLC and your children aren’t members of the management, the value of the units transferred to them can be discounted quite heavily, often up to $40 % of their market value.
Lower property tax
Your children can now receive an advance on their inheritance, but with a lower tax burden than what they would personally pay. Income Taxand your total net worth is reduced, resulting in lower final estate taxes upon your death.
The ability to discount the value of units passed to your child also allows you to give them a gift of discounted LLC units, thus exceeding the current $16,000 gift limit without paying a any fees. gift tax.
For example, if you want to gift one of your children non-managed shares of LLC units worth $1,000 per share, you can apply a 40% discount of value of each unit down to $600). Now, instead of transferring 16 shares before paying the gift tax, you can transfer 26 shares.
This way, you can give away important gifts without paying gift tax, while reducing the value of your property and reducing your eventual property taxes. heir will have to face.
What can I transfer into an LLC?
You can transfer any assets into a limited liability company, and then pass those assets on to your descendants. Typical properties include:
- Cash: You can transfer money from your personal bank account into the LLC, then distribute that money among the LLC members.
- Property: You can transfer ownership of land and structures built on it into your LLC. However, check with any mortgage owners before making such an assignment, as you may need their approval.
- Personal property: You can transfer ownership of cars, stocks, precious metalartwork or other important belongings into your LLC.
How does an LLC pass on death?
When the owner of a limited liability company dies, some states state that the limited liability company must dissolve unless a specific succession plan has been made. However, dissolution can be avoided by providing for an assignment to another individual after death detailed in the operating agreement, creating a shared tenancy membership, creating a revocable trust to hold an LLC membership or endorse the LLC through the court to determine a succession plan.
What are some disadvantages of an LLC?
When compared to sole proprietorship, a limited liability company is more expensive to create and maintain. Depending on the state, a limited liability company typically requires different incorporation and ongoing fees to maintain the limited liability company. Sole proprietorships usually do not require registration and therefore any associated fees.
Is the owner of a limited liability company liable for the debts of the limited liability company?
No, the owners of an LLC are not responsible for the debts of the company, which is one of the main benefits of an LLC. An LLC provides protection to owners from creditors in the event the company defaults, goes bankrupt, or is unable to meet its obligations. Creditors are not allowed to take the owner’s personal property.
Key point
A family-owned limited liability company is a powerful tool for managing your assets and passing them on to your children. You can maintain control of your assets by appointing yourself as a limited liability company manager while providing significant tax benefits for both yourself and your children.
Because estate planning is complex, and the regulations governing a limited liability company vary from state to state and evolve over time, always check with a Financial Advisor before formalizing your LLC plan.
You will also need legal assistance to create an LLC. You will also incur both the initial fee and the annual fee. Count all of these costs into your plan and your decision as to whether this type of structure is right for your estate.
