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Five Things to Know Before Including a Limited Liability Company in Your Estate Plan
When it comes to protecting your hard-earned money and property, it is important that you have the right plan, which can include a number of tools for your unique situation. One tool that might benefit you is a limited liability company (LLC) that owns some of your accounts and property.
What is a limited liability company?
An LLC is a business structure that can own many types of accounts and property. The LLC is owned by members who contribute money or property to the LLC. You can have a single-member-owned LLC or a multimember-owned LLC. If there is more than one member, management of the LLC can either be carried out by each member or the members can elect a manager.
What can an LLC own?
When people think of an LLC, they assume that it is a structure to operate a business. However, many types of accounts and property can benefit from being owned by an LLC:
- Real estate. An LLC can own property such as a second home, a rental property, or a property that has been in the family for generations.
- Investments. In some cases, an LLC can be formed to allow multiple people to pool their money and invest it with a larger volume.
- Expensive and risky property. An LLC can own items such as airplanes and boats.
Why should I consider using an LLC in my estate plan?
Because the LLC is a separate entity, typically the LLC’s creditors can only go after the LLC’s money and property, not the member’s personal accounts or property. Also, if the proper formalities are in place, the member’s personal creditors may not be able to reach the LLC’s accounts and property to satisfy the member’s personal debts. Note: In some states, a single-member LLC does not enjoy the same protection from the member’s personal creditors. The rationale of these laws is that your creditors should be able to seek relief through your LLC interests to satisfy their claims because there are no other members that will be negatively impacted by seizure of money and property owned by the LLC.
Anything that is owned by the LLC, either retitled into the name of the LLC during your lifetime, bought by the LLC, or transferred by operation of law at your death, will not go through the public, costly, and time-consuming probate process. The probate process only transfers accounts and property that you owned at your death. By using an LLC, the LLC—not you—owns the accounts and property. However, if you own a membership interest in your own name, the transfer of the membership interest at your death may need to go through the probate process.
How can an LLC be used in an estate plan?
How It Works
During your lifetime, you create an LLC and then transfer accounts and property to the LLC or name the LLC to be the beneficiary of your accounts and property at your death. Once it has been created, you may also purchase property or create accounts in the name of the LLC. As the creator of the LLC, you will be a member. A member is someone who owns an interest in the LLC, and depending on the number of members and the type of management, may also manage the LLC. If you are married, your spouse may also be a member. You can also add other people as LLC members either when the LLC is created or later. Be aware that there may be gift tax consequences associated with adding members who do not contribute their own money or property to the LLC. The LLC becomes the owner of the accounts and property and it is operated as an entity separate from its individual members. It is this separation that allows an LLC to have some level of asset protection. At your death, the only item that may need to be transferred is your ownership interest in the LLC; the accounts and property owned by the LLC will remain owned by the LLC.
Most LLCs have an operating agreement that outlines the rules for managing and transferring a member’s interest in the LLC. If you currently have an LLC but do not have an operating agreement, or have an operating agreement but need to update it, please reach out to an experienced business law attorney as soon as possible. Some provisions that should be included in the operating agreement are
- who the members of the LLC are,
- the percentage of ownership that each member has,
- how conflicts among members are settled,
- any restrictions on a member’s ability to transfer their membership interest (including transfers to a trust), and
- what happens to each member’s interest if the member dies (in most cases, whatever is stated in the operating agreement controls).
As an additional layer of protection, you may choose to transfer your membership interest in an LLC to a revocable living trust. As the creator, trustee, and beneficiary of the trust, you would still be able to participate in the management of the LLC and benefit from the LLC, you would just do so as the trustee of the trust and not as an individual. Because the trust owns the membership interest, transfer of the membership interest will not require probate, because the trust does not die. In fact, the trust can continue to own the membership interest after your death, which you can include in the trust’s instructions, along with a provision allowing a successor trustee to step in for you and handle LLC matters on behalf of the trust’s beneficiaries. Alternatively, you could state in the trust instructions that the membership interest be distributed to a named beneficiary at your death or at a specific time in the future. At that point, the beneficiary would have control of the membership interest.
Best Practices for Using an LLC
To ensure that you can take full advantage of the benefits associated with an LLC, it is critical that you follow all of the rules. An LLC is supposed to be a separate entity and you need to treat it as such. This means that there are some formalities you need to abide by, some of which include filing your annual report with the appropriate state government office and keeping separate records to showcase all transactions and meetings that the LLC is involved with. Additionally, you need to keep your personal money and property separate from the LLC’s money and property. You should not treat the LLC bank account as your own personal wallet.
Effective January 1, 2024, LLCs that meet the definition of a reporting company will need to file a Beneficial Ownership Information Report with the Department of the Treasury’s Financial Crimes Enforcement Network. The report must include the name, birthdate, address, and unique identifying number, issuing jurisdiction, and image of an acceptable identification document for all of the beneficial owners of the LLC. A beneficial owner is an individual who owns or controls 25 percent or more of the ownership interest of the company or who exercises “substantial control” over the company. For reporting companies created after January 1, 2024, company applicants must provide their name, birthdate, address, and the unique identifying number, issuing jurisdiction, and image of an acceptable identification document. A company applicant is either the individual who files the document that creates the entity or registers the entity to do business in the United States in the case of a foreign reporting company, or the individual who is primarily responsible for directing or controlling another person’s filing of the document.
What are my next steps?
We understand how important it is to protect yourself, your loved ones, and all that you have worked so hard to earn. A comprehensive estate plan can help accomplish your goals by implementing the right strategies for your situation. If you would like to explore how an LLC can help you plan for your future and the future of your loved ones, please reach out to our firm.