The Benefits of a Family Limited Liability Company (LLC)

At first glance, high-net-worth individuals may assume that a family LLC is a form of business ownership. While it could be interpreted that way, it is actually an LLC for estate planning. As such, it is a powerful means to transfer wealth to family members now without concern about gift taxes. It also helps prevent the drain of estate taxes on bequests to beneficiaries on your passing.

Is this approach the best fit for your own business? Read on to find out.

What is an LLC?

An LLC, or limited liability company, is a legal arrangement that is valid throughout the United States, but, each state has their own rules about forming an LLC, running an LLC, and paying taxes from the LLC.

LLCs enjoy some of the benefits of incorporation, such as protection from personal liability in the event of debt and tort claims or lawsuits. This means that individual property is protected such as home, car, and cash reserves.

People who are part of a family LLC are called members, and run the entity as they see fit while being subject to fewer regulations than a corporation.

While an LLC offers the liability protection of a corporation, profits are handled as if they came from a partnership, which means pofits and losses flow directly to members personal tax returns – the LLC usually does not pay any taxes on profits.

Is A Family LLC Right for You?

High net-worth families worked hard to establish their wealth, and most desire to limit or eliminate taxation on your estate or on gifts to your children. This is where a family LLC shines.

While estate taxes don’t take effect unless an estate (in 2017) is valued at $5.49 million, annual gift taxes do kick in after only $14,000 to unmarried LLC members and $28,000 for married members. There is a lifetime cap on gifts of $5.49 million if you exceed the annual cap. Gift and estate taxes are paid by the person or entity giving the gift and not the person receiving it.

After the limit is reached, the 40% estate tax goes into effect. Elimination of the estate tax is something President Trump campaigned on and wants in his tax reform proposal. When all this is taken into consideration, the creation and use of a family LLC is a great idea.

Let’s imagine that you have amassed significant wealth and start a family LLC. It is run by you with your children being LLC members without the right to vote. LLCs have shares that are backed by its portfolio, and how these shares, more commonly known as units, are valued is entirely up to you. Shares can be distributed to your children.

Under normal circumstances, you can gift up to $13,999 to your children without incurring a gift tax. Under current tax law, the distribution of the shares is heavily discounted – up to 40% of market value. This means that if you value each share at $500, you can transfer more than 28 shares to each child, you are able to give them each 46 shares. Doing this lets you distribute gifts tax-free while reducing your future estate’s worth in hopes it will be under the limits for estate tax exemption should the estate tax remain.

LLCs can hold almost any kind of asset imaginable for passing on to your kids and grandkids.
Cash can be transferred into the LLC from your bank account and then distributed among LLC members.

Property titles to real estate and buildings can be transferred to the LLC too. This also includes personal items.

The Bottom Line

There are important advantages to creating a family LLC that manages and distributes assets to family members. Shielding assets from current or future taxes is the primary benefit along with you maintaining control of your estate by making yourself the LLC manager.

Nevertheless, high-net-worth estate planning is complicated and you should seek the advice of a certified financial planner and an estate lawyer before you form an LLC for your family.

Regards,

Ethan Warrick
Editor
Wealth Authority


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