Family LLC Estate Planning: Everything You Need to Know
Family LLC estate planning is a method of protecting your assets and passing them on to your family members. 3 min read
2. What Is an LLC?
3. Why Would I Want an LLC for Estate Planning?
4. Family Limited Partnerships (And Similar Entities)
Updated November 4, 2020:
Family LLC estate planning is a method of protecting your assets and passing them on to your family members. Whether this is the best solution for your family estate planning purposes depends greatly on the value of your assets.
Limited Liability Companies and Limited Partnerships
Forming limited partnerships (LPs) or limited liability companies (LLCs) is a common avenue for estate planning. LLCs and LPs allow people to give gifts to their family members. This reduces the assets' value and protects them from taxation. These entities help manage a family's property after it has been gifted. They also allow the donor to control the assets and protect them from creditors.
Limited partnerships and limited liability companies are similar in nature. However, some states, such as North Carolina, prefer LLCs for estate planning.
What Is an LLC?
All fifty states recognize LLCs. However, every state has unique regulations for LLC establishment, operation, and taxation. LLCs are best understood as legal entities that combine characteristics of both partnerships and corporations. Owners of an LLC are called members. When joining an LLC, member's personal assets, such as homes and cars, will be shielded from liability in case of lawsuits or debts.
Unlike corporations, which are subject to extensive regulations, LLCs can be operated any way the members deem necessary. When the members of an LLC also serve as managers, the LLC is very similar to a general partnership. LLCs differ from typical business entities in the way that the profits and losses of an LLC are reported on the member's personal tax returns. In addition to being advantageous to small-business owners, the hybrid nature of LLCs makes them a good choice for estate planning purposes. For income tax purposes, LLCs will usually choose to be treated as partnerships.
An LLC created for estate planning will typically be manager-managed, which means that the owners will not manage the LLC themselves.
Family LLC estate planning provides several benefits, including:
- Lifetime property protection
- Guarantee of assets transfer to family members
- Reduced taxes for you and your family
Make sure to do a thorough research to decide if creating an LLC for estate planning purposes is the right choice for your family.
Why Would I Want an LLC for Estate Planning?
The main reason to form an LLC with your children is the reduction of estate taxes that must be paid on your children's inheritance. With a family LLC, you can also transfer assets to your children during your lifetime without paying expensive gift taxes.
Most people form a family LLC to avoid the estate tax. It's important to understand, however, that the forty percent estate tax only applies to estates that are worth over $5,340,000. Below that amount, you will not need to pay the estate tax. You will have to pay a gift tax if you are unmarried and transfer over $14,000 in assets in a year or if you are married and distribute $28,000 in assets.
The person giving the gift has to pay the tax. The asset limit resets every year. Fortunately, the asset limit is applied to individual recipients. This means that you could give every member of your family up to $13,999 without having to pay the gift tax.
When you exceed the $14,000 annual limit, a lifetime cap on gift-giving is $5,340,000. Every dollar over $14,000 will be applied to this cap. Once the cap is exceeded, the gift tax will increase to forty percent, the same as the estate tax.
Family Limited Partnerships (And Similar Entities)
If you have a high net worth, a family limited partnership can be a good estate planning solution. However, these entities are often challenged by the IRS because they allow you to transfer assets between family members while reducing transfer taxes. If you create a business entity correctly, you will shield your valuable assets from transfer taxes. If you want to successfully reduce your potential transfer taxes, you have to make sure that your family business entity is properly managed and formed for a legitimate reason not related to taxes.
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