HOW TO USE AN LLC FOR ESTATE PLANNING PURPOSES
April 5, 2023
It's important for every adult with assets to have an estate plan, and it's especially important for business owners. One tool that might benefit you and your family is a limited liability company (LLC) that owns some of your accounts and property. Many families use LLCs as an asset protection tool, and to avoid probate.
WHAT IS A LIMITED LIABILITY COMPANY?
A limited liability company (LLC) is a business entity that can own many types of accounts and property. The LLC is owned by member(s) who contribute money or property to it. If there is more than one member, management of the LLC can either be carried out by each member or a manager they select.
WHAT CAN I PUT IN AN LLC?
When people think of an LLC, they usually think of freelancers and partners using it 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 other family property.
Investments. In some cases, an LLC can be formed to allow multiple people to pool their money and invest it with a larger volume.
'Toys' and expensive possessions. An LLC can own items such as airplanes, boats, and RVs.
BENEFITS OF INCLUDING AN LLC IN YOUR ESTATE PLAN
An LLC is a great vehicle for asset protection. Because the LLC is a separate entity, the LLC's creditors can typically only go after money and property in the LLC. Your personal accounts and property are protected. The same goes for the reverse. If the proper formalities are in place, your personal creditors cannot go after LLC assets. And in Ohio, if the LLC is sued, the plaintiff can only go after money and property in the LLC.
Anything that is owned by the LLC, bought by the LLC, or transferred to it at your death, will not go through the public, costly, and time-consuming probate process. The probate process only involves transferring assets that YOU own at your death. By using an LLC, the LLC—not you—owns the accounts and property. However, if you own a membership interest, the transfer of the membership interest may need to go through the probate process.
HOW CAN AN LLC BE USED IN AN ESTATE PLAN?
Here's how it works. During your lifetime, you create an LLC and then transfer accounts and property into it. Alternatively, you can name the LLC to be the beneficiary of your accounts and property at your death. Once the LLC is created, you may also purchase property or create accounts in the name of it. As the creator of the LLC, you will be a member, i.e., you own interest in it. Depending on the number of members and the type of management, may also manage the LLC. If you're married, your spouse may also be a member. You can also add other people to be members of the LLC. Be aware that there may be gift tax consequences associated with adding members who don't contribute their own money or property to the LLC.
The separation of property from yours to the LLC allows for asset protection. At your death, the only item that may need to be transferred through probate is your ownership interest in the LLC. The accounts and property owned by the LLC will remain owned by it.
Start with an Operating Agreement
Most LLCs have an operating agreement that outlines the rules for managing and transferring a member’s interest. If you currently have an LLC but don't have an operating agreement, or have an operating agreement but need to update it, we can help you. Our attorneys at DuPont & Blumenstiel are skilled not only in estate law, but in business and tax law as well.
Here are some provisions that should be included in your operating agreement:
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
What to Do with Your Membership Interest at Death
As an additional layer of protection, you may choose to transfer your membership interest 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. You can also continue to 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. In fact, the trust can continue to own the membership interest after your death. In the trust document, you can include instructions on who will manage your membership interest when you die. For example, you may draft 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 another specific time. At that point, the beneficiary would have control of the membership interest.
BEST PRACTICES FOR USING AN LLC AS AN ESTATE PLANNING TOOL
To ensure that you can take full advantage of the benefits associated with an LLC, it's critical that you follow 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. This includes filing your annual report with the state of Ohio and keeping separate records to showcase all transactions 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 if it was your own.
You'll also need to follow some federal guidelines. 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.
READY TO CREATE AN LLC?
We understand how important it is to protect yourself, your loved ones, and your assets. 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 at 614-389-9711.