Ensuring you have a well-designed strategy to safeguard your valuable assets and property is of utmost importance, and this often requires utilizing tailored tools that suit your unique circumstances. One option to explore within your estate planning is the inclusion of a limited liability company (LLC) to safeguard certain accounts and property.
Understanding a limited liability company (LLC)
A limited liability company (LLC) is a business structure that allows for the ownership of diverse accounts and property. Its ownership rests with the members who contribute either funds or assets to the LLC. The nature of an LLC can vary based on the number of individuals involved, resulting in either a single-member or multi-member configuration. The management of the LLC can be conducted by individual members or by a manager elected by the members.
Expanding the scope of ownership for an LLC
An LLC can own more than just a business. It can also hold various types of accounts and property, such as:
Real estate: Whether it's a second home, rental property, or a property passed down for generations, an LLC can own it.
Investments: An LLC can be used to pool the funds of multiple individuals and invest in assets with a larger volume.
Expensive or high-risk assets: Items like airplanes and boats can be owned by an LLC to provide liability protection.
The advantages of including an LLC in your estate plan
Asset Protection
Including an LLC in your estate plan can offer several benefits, with asset protection being one of the key considerations. As an LLC is considered a separate legal entity, its creditors typically can only pursue the LLC's assets and property, not those of the LLC members. Properly setting up and maintaining the LLC can help prevent personal creditors of the members from accessing the LLC's accounts and property to satisfy their claims. Please keep in mind that certain states may not offer the same degree of protection against personal creditors for single-member LLCs. In such cases, personal creditors may pursue the LLC interests to satisfy their claims, as there are no other members who would be negatively impacted by the seizure of the LLC's assets and property.
Probate Avoidance
When your assets are owned by an LLC, any property or accounts transferred to it during your lifetime, or transferred through operation of law upon your death, can bypass the costly and time-consuming probate process. Probate only handles the transfer of assets that were solely owned by you at the time of your death. By utilizing an LLC, the accounts and property are owned by the LLC, not by you. However, if you hold membership interest in your name, the transfer of this interest at the time of your death may require going through the probate process.
Incorporating an LLC into your estate plan
The process of incorporating an LLC into your estate plan involves creating the LLC during your lifetime and transferring your accounts and property to the LLC or designating it as the beneficiary of your accounts and property upon your death. You can also purchase property or open accounts in the name of the LLC. As the individual establishing the LLC, you will assume the role of a member, and depending on the chosen management structure, you may have the opportunity to oversee the operations of the LLC. If you are married, your spouse can also become a member, and you have the flexibility to include additional members in the LLC at a later stage. However, adding members who don't contribute their money or property may result in gift tax consequences. The LLC will own the accounts and property, and it will operate as a separate entity from its members, providing a level of asset protection. Upon your death, the transfer of ownership interest in the LLC may be the only necessary step, and the accounts and property owned by the LLC will remain under its ownership.
Operating Agreement for LLCs in Estate Planning
LLCs generally have an operating agreement that sets out the rules for managing and transferring a member's interest in the LLC. If you currently own an LLC without an operating agreement or need to update it, it is recommended that you contact an experienced business law attorney with expertise in estate planning as soon as possible. When incorporating estate planning into your operating agreement, consider including the following provisions:
1. The identification of the LLC members.
2. The percentage of ownership each member holds.
3. The procedure for resolving conflicts between members.
4. Any restrictions on a member's ability to transfer their membership interest, including transfers to a trust.
5. The fate of a member's interest if they pass away (in most cases, the terms of the operating agreement govern).
Trust Agreement for LLC Membership Interest
A Trust Agreement can provide an additional layer of protection for your LLC membership interest within your estate plan. By transferring your membership interest to a revocable living trust, you can act as the creator, trustee, and beneficiary of the trust. This arrangement allows you to continue managing the LLC and enjoying its benefits as the trustee of the trust, rather than as an individual. Since the trust becomes the owner of the membership interest, transferring it won't require going through the probate process, as the trust itself doesn't die. Even after your death, the trust can continue to own the membership interest as specified in its instructions. It can include provisions for a successor trustee to manage the LLC on behalf of the trust's beneficiaries. Alternatively, you can instruct the trust to distribute the membership interest to a designated beneficiary at a specified time or upon your death, granting them control over the membership interest. If you're considering creating a trust agreement, it's advisable to seek the assistance of an experienced estate planning attorney to ensure it aligns with your goals and objectives.
Best Practices for Using an LLC in Estate Planning
To fully capitalize on the advantages offered by an LLC in your estate plan, it's crucial to adhere to all the rules and regulations associated with its operation. Since an LLC is a separate legal entity, it should be treated as such. This entails following specific formalities, such as submitting your annual report to the relevant state government office and maintaining distinct records of all transactions and meetings involving the LLC. It's equally important to keep your personal finances and assets separate from those of the LLC. Avoid using the LLC's bank account as your personal fund to maintain clear separation and protect the integrity of the LLC.
Commencing January 1, 2024, reporting companies that are classified as LLCs will need to submit a Beneficial Ownership Information Report to the Financial Crimes Enforcement Network of the Department of the Treasury. This report should include the name, birthdate, address, and unique identification number of all beneficial owners of the LLC, along with an acceptable identification document's image and issuing jurisdiction. A beneficial owner is an individual who possesses or exercises significant control over 25% or more of the ownership interest in the company. For LLCs formed after January 1, 2024, company applicants must provide their name, birthdate, address, unique identification number, issuing jurisdiction, and image of an acceptable identification document. A company applicant refers to the individual who creates the entity or registers it to do business in the United States (for foreign reporting companies) or the person mainly responsible for directing or controlling another individual's submission of the document.
What are your next steps in estate planning?
If you aim to protect your assets and secure your family's future, taking the necessary steps is paramount. Crafting a well-designed estate plan tailored to your unique needs can be instrumental in achieving your objectives. If you're interested in learning more about how incorporating an LLC can assist you in.
Many of our clients are business owners, and indeed, Reno is a fantastic place to establish a business, whether it is a small operation or a large corporate location. There are a number of different reasons why the state of Nevada is very attractive to members of the business community.
One of them is the fact that there are not a lot of heavy taxes on businesses in our state. If you were to establish a limited liability company in Nevada, you would not have to worry about paying any franchise taxes or state level personal income taxes. Plus, you do not have to be a resident of the state to own or possess shares in a business in the Silver State and take advantage of these tax benefits.
The state also provides some very robust incentives in an effort to lure businesses. There are sales tax abatements on capital equipment purchases, and there are personal and modified business tax abatements. If you recycle, you get a real property tax abatement, and there is assistance available for intellectual property development and grants are available for training employees.
Another major benefit is the relatively low cost of living compared to places like San Francisco, New York, and Seattle. People that need jobs can afford to live in Reno and other cities in Nevada, so employers can find qualified workers to fill positions at all levels. Plus, if you are trying to recruit top talent, the fact that money goes a lot further in Nevada will definitely be a very useful bargaining chip.
Without question, Reno has an excellent environment for starting a business. If you decide to start a small business, you have to choose the correct business structure. The attorneys here at our firm have a great deal of expertise assisting clients that are establishing businesses. Asset protection is usually a very big concern. It is important to separate your personal assets from the assets and the actions of your business entity.
We mentioned limited liability companies previously, and as we have stated, there are definitely tax benefits in our state if you establish an LLC. The structure is also very good for protecting assets. If your limited liability company was to be sued, or if creditors were to seek a judgment against the LLC, it is very likely that your personal property would be protected. On the other side of the coin, if you were personally targeted, assets held by the limited liability company would be protected in most cases.
Another asset protection structure that can be quite useful for many people is the family limited partnership. As the name would imply, people that are involved have to be members of the same family. If you were to set up a family limited partnership, you would be the general partner, and family members that you add to the partnership would be limited partners. As the general partner, you would have sole decision-making authority.
To explain the value of a family limited partnership for asset protection, we will provide an example. Let’s say that you own three apartment complexes and a shopping center. You could convey each property into a separate family limited partnership. If there is any legal action taken against property that is held in any of these partnerships, that single family limited partnership would be targeted; the rest of your holdings would be out of play.
You could place your bank and brokerage accounts into another family limited partnership and leverage the financing so that you really do not have a lot of equity in any of the investment properties that could be attached.
The asset protection works in the other direction as well. If you or any other member of a family limited partnership was be personally sued, assets that are held by the partnership would be protected. These are a couple of business structures that are commonly utilized, but there are others. The ideal choice will depend upon the circumstances.
If you would like to learn more about any estate planning, financial planning, or elder law matter, attend one of our free Webinars. There are number of dates on the schedule, and you can click this link to obtain more information.
