Limited Liability Companies (LLCs) can be a great option for small business owners, but they are also useful in estate planning. An LLC, being a distinct entity from you personally, can help you pass assets to your children while avoiding gift and estate taxes. An LLC is somewhere between a partnership and a corporation. Like a corporation, LLC owners are protected from liability. But like a partnership, the owners report income and losses from the company on their personal tax returns. LLCs also have fewer fees and filing requirements than corporations, as well as less restrictive rules about how the company is organized and managed.
LLCs can hold cash, real property, or personal property. Each state has its own rules on how LLCs are established.
For many families, particularly in Maine, LLCs can be a great vehicle for managing a family property. It can limit who interests can be sold or transferred to and it can provide instruction on how to allocate income, capital improvement costs, and expenses.
Likewise, for real estate, many estate planning clients use LLCs as a way to manage real estate that they rent out as a way to limit potential liability.
If you have a large estate, an LLC can be used to pass assets to children without being subject to gift and estate taxes. The way the family LLC works is that the parents and children create the LLC and transfer assets into it. Once the assets are in the LLC, each owner, called Members, have an interest percentage in the LLC. Family LLCs are often set up with the parents as the managing members and the children as the non-managing members, so the older generation remains in control of decision-making. If a parent chooses to transfer membership interests their children, there could be a valuation discount of up to 40 percent of the market value for that gift. For example, a parent can transfer an interest worth $10,000 to a child, but if a 40 percent valuation discount was applied, the gift would only be taxed at $6,000 when transferred. This allows parents to transfer more assets to their children without hitting the gift tax exclusion limit while at the same time reducing the value of the parents’ estate.
LLCs may have other advantages including protection from creditors, streamlining management of assets, and providing flexible control over the management of the assets.
Some disadvantages to forming an LLC are initial costs and ongoing costs; reporting rules and regulations; administrative complications. As with all estate planning, clients need to consider whether creating an entity has more advantages than disadvantages.
If you think an LLC might make sense for your family, you should consult with your attorney and accountant before setting one up.
Rev 11/23
The information presented on this website is general in nature and not intended to be legal advice. No attorney-client relationship will exist with Jones, Kuriloff & Sargent, LLC unless agreed to in writing. Please contact us to discuss your particular situation.
