Limited Liability Company In Estate Planning

/ April 30, 2011

A limited liability company can be used as an effective wealth management tool for certain estates. A limited liability company (“LLC”) is a corporate entity and under Minnesota law, it can be formed for “any lawful purpose or purposes…”[1] An LLC can be useful to reduce an estate’s exposure to taxes at death, help ensure assets remain within a family line, and help avoid probate.

LLC as Wealth Management

Individuals can form an LLC, transfer ownership of assets to the LLC but can then structure his or her interest in the LLC in a certain way to decrease the actual value of his or her estate.

Example: Mom and Dad can form an LLC and transfer all of their assets to the LLC. Mom and Dad can limit how much interest they actually own in the LLC (e.g., 1% each) but can retain control over the management of the LLC to ensure the assets are protected and managed properly. Children can own the rest of the LLC interests but can have their control rights restricted until Mom and Dad pass away. When Mom and Dad pass away, only their limited ownership interest in the LLC (that 1% each) is what is included in their estate.

Using an LLC for high net worth estates can dramatically decrease the potential tax exposure. Individuals considering using an LLC for wealth management purposes must understand that they will technically no longer own specific assets. Instead, they will own an interest in a company that will own the assets.

Additionally, an LLC can simplify the process of gifting assets to family members. Instead of gifting specific assets, an individual can gift interests in the LLC, which is useful when it is difficult to determine the actual value of the assets.

Protection of Assets

When an LLC is formed for more traditional business purposes, one of the primary reasons for the formation is to limit the owner’s personal liability from creditors. While the same holds true to a certain extent when using an LLC for wealth management purposes, the protection is primarily to keep assets within the family line. LLC agreements can restrict to whom interests can be transferred, which in cases of divorce can limit interests from being passed to individuals outside of the family line.

LLC as a Probate Avoidance Tool

When an individual dies owning a variety of assets, the estate will have to be probated unless those assets have beneficiary designations or another probate avoidance tool is in place. By simplifying one’s estate to interest in an LLC, it is much easier to transfer those interests at death without the need of probate.

An LLC is extremely useful when an individual owns property in a state other than his or her home state. If an individual passes away leaving property in a different state from his or her home state, the estate could face an ancillary probate. As Maggie Green explains, an “[a]ncillary probate can be expensive depending upon the state in which the probate is being opened, the size of the estate being administered, and the property subject to the administration.”[2] However, if an LLC owns the property rather than the individual, when the individual passes away, there would be no need for an ancillary probate.

If an LLC is used as a wealth management tool, individuals must ensure that the entity is formed properly and that all corporate formalities are followed with regards to recording keeping and corporate governance matters. As states and the federal government face severe deficits, revenue departments are more apt to review or audit certain LLCs’ tax and corporate filings to confirm the LLC’s legitimacy and that the appropriate taxes are being paid.

[1] MN Statute 322B.10

[2] Ancillary Probate

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