How LLCs Can Be Used in High-Net-Worth Estate Planning

What Is a Family LLC?

An LLC is a type of legally recognized business structure that combines aspects of corporations and partnerships. Like a corporation, an LLC protects members from personal liabilities by separating its assets from each member’s personal assets, meaning the IRS cannot seize personal assets to cover the LLC’s liabilities or debts. Additionally, like a partnership, LLCs allow profit to “pass through” to members’ individual tax returns instead of being taxed at the business level, avoiding double taxation.

A family LLC operates under the same frameworks and guidelines as any other LLC, but its members are all part of the same family. When you create a family LLC, you are essentially treating the management of your family’s assets, such as investment accounts or real estate, as a business. In some states, LLCs will automatically dissolve when the owner passes away. However, when creating your LLC, you can create a plan to avoid this dissolution and allow ownership of the LLC to be transferred after you die, such as by creating a joint tenancy. Membership of an LLC [M1] can also be placed in a living revocable trust.

How Does an LLC Differ from a Trust?

Trusts and LLCs are both estate planning tools that can be used to protect assets and reduce estate taxes. Living revocable trusts protect the assets within them from probate court proceedings, but they do not provide much asset protection. If a creditor sues the grantor of a revocable living trust, the assets in the trust are vulnerable to seizure in that lawsuit. An irrevocable trust offers more asset protection than a revocable living trust, protecting the assets from the grantor’s potential future lawsuits and creditors, but its irrevocability inherently requires the grantor to give up ownership and control over the assets in the trust. The beneficiaries or terms for distribution cannot be changed after you have placed assets in an irrevocable trust. In contrast, an LLC can provide effective asset protection while maintaining control and flexibility. LLC members retain control over the LLC’s assets throughout their lifetime and can update their beneficiaries and distribution strategies as needed. Your children or other beneficiaries can be members of the LLC and hold shares in its assets without necessarily having control over or a vote in the financial decisions you make. You can certainly solicit their input, but you retain the final say over how you manage the LLC’s assets.

What Are the Benefits of Using an LLC in Estate Planning?

In addition to flexibility in decision-making, asset protection, and pass-through taxation, LLCs are a powerful tool for limiting the effects of gift taxes when transferring large amounts of money or assets during your lifetime. In 2023 gift taxes are applicable for gifted amounts that exceed $17,000 per recipient over the course of a year. However, the manager of a family LLC can transfer units of the LLC to nonmanaging members at discounted valuation rates, allowing for up to a 40% discount on the assets’ market value in many cases. Lifetime gifting is an effective strategy for reducing the value of an estate while keeping wealth in the family or distributing it to your intended beneficiaries. The discounted valuation LLCs offer can expedite this gifting process, making it possible to transfer larger amounts of wealth more often without incurring gift taxes.

What Are the Drawbacks of Using an LLC in Estate Planning?

            There are some fees and paperwork associated with creating and maintaining an LLC, including a formation fee and the need to meet ongoing legal compliance requirements in some states. Maintaining proper records and complying with annual filing requirements are crucial to keeping your LLC in good standing and avoiding legal repercussions. Using a family LLC for estate planning can make your financial plan more intricate, so it may be a good idea to seek an experienced financial advisor or estate planning attorney’s counsel. As of 2023 estates valued under $12.92 million are exempt from the federal estate tax, so those with smaller estates may not benefit from the added complexity of a family LLC. However, the exempted amount is expected to drop to $7 million in 2025, meaning more high-net-worth individuals will want to seriously consider how to mitigate the effects of estate taxes.