Using a Family LLC for Estate Planning

Using a Family LLC for estate planning involves placing family assets into a limited liability company to manage and transfer them efficiently while potentially reducing taxes.

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If you’re wondering about a family LLC, estate planning is probably top of mind. But what is a family LLC? How could it benefit your estate planning? Are there other choices that might be a better fit? In this guide, we’ll cover all the basics of a family LLC.

For starters, a family limited liability company (LLC) is an LLC that’s owned exclusively by members of the same family. Like a trust, it’s generally used to plan ahead for how an estate will be distributed when a person dies. Often, families use this method to help reduce their estate and gift tax burdens in a legal but savvy way.

Generally speaking, the individual planning their estate creates the family LLC and acts as its manager. Their children become non-managing members of the LLC, each with a partial membership interest in the business. Depending on the estate holder’s wishes, the LLC’s assets are gradually transferred over time or given to the heirs when the managing member passes.

Benefits of Using a Family LLC for Estate Planning

There are quite a few benefits to using a family-owned LLC as a tool for estate planning. First, like any LLC, a family LLC offers personal asset protection. Members of the LLC usually don’t have to lose their own belongings if the family LLC gets into legal trouble. It also allows you to maintain control of any assets you want your heirs to receive until you’re ready for them to own them.

As long as an LLC has a well-written operating agreement, membership interest can smoothly change hands. So, you can smoothly transfer the LLC’s assets to your heirs by changing their membership stake in the company. This operating agreement-led transfer often allows you to avoid a lengthy probate process, too.

Estate and Gift Tax Planning

A key benefit of a family LLC is the tax advantage it presents. A family limited liability company lets you reduce the amount of taxable estate you hold. When you pass, all of your assets are potentially subject to federal estate taxes. Currently, though, this federal tax only applies to larger estates: as of 2023, the standard federal estate tax exemption is $12.9 million. It’s a lifetime exemption, too.

Other potentially problematic taxes are gift taxes. If you give money or assets to your heirs while you’re still alive, those amounts can be taxable if they exceed the annual gift tax exclusion of $17,000 ($34,000 for married couples). Any money that exceeds that annual gift tax exemption limit also deposits toward the $12.9 million estate tax threshold.

Forming a family LLC often reduces your estate tax liabilities. Typically, in a family LLC, you transfer some of your assets to the LLC, and the LLC begins owning them. Then you can distribute membership interest between you and your heirs. Usually, you’ll grant non-management interests to your heirs. You can claim a steep valuation discount for gifting non-membership interests — up to 40%.

Tax benefits and deductions can be complicated, so we generally recommend getting legal advice from a licensed professional. 

Setting up a Family LLC for Estate Planning Purposes

For the most part, the process for forming a family LLC is the same as starting any LLC. But here’s a quick look at how the formation procedure goes.

1. Choose a state to form your family LLC in.

You can create an LLC in virtually any state, but we generally recommend forming an LLC in the state where you live. That keeps things simplest, especially for ongoing compliance requirements like filing your annual report.

2. Name the family LLC.

You’ll need to choose a name for the family LLC that’s not already in use in your chosen state. The name should also comply with any state laws, such as including a designator like “LLC” or “limited liability company.” Since the family LLC will not be marketing to customers, you don’t have to worry as much about creating a savvy, hip name (unless you want to). Something as simple as “Smith’s Legacy, LLC” might work.

You can use our business name search tool to quickly check if your desired name is available.

3. Pick a registered agent.

You’ll need to designate a registered agent, or an individual who can accept service of process on your behalf. All states require a registered agent to be present at their listed address during all regular business hours. That’s why we generally recommend using a registered agent service to fill this role for you.

4. File your family LLC formation documents.

In most states, the formation documents for an LLC are called the “Articles of Organization.” Other states call it the “Certificate of Formation” or something similar. You won’t find a specific form for a “Family LLC,” so the generic LLC form is fine to use.

The Articles of Organization will require some basic information about the LLC, such as its name, the registered agent’s information, and a mailing address. Once you file this form, your family LLC will officially exist.

5. Draft an operating agreement for the family LLC.

This step is probably the most crucial, as the operating agreement will sort of act like your will within the context of the business structure. Your operating agreement should describe the assets you’re contributing, who the members (read heirs) are, if they have voting rights, and how much of a membership interest each member holds. It’ll also describe how and when the child members will “inherit” different assets from the LLC through the transfer of ownership interests.

You should also set forth who will manage the family LLC’s affairs. Basically, your operating agreement should include any and all terms you want to set for how, when, and how much each of your heirs will receive through your LLC.

6. Transfer assets to the family LLC.

Once your LLC is set up, you can transfer the assets you want the family LLC to hold. You’ll do this in the form of a member contribution; basically, you’ll create a contract that gives the LLC full ownership of those family assets. You can transfer almost any type of asset, such as real estate, precious metals, works of art, cash, and more. 

Be sure to keep careful records of all property that you transfer to the LLC. And after the assets are transferred, be sure to treat them like they’re the LLC’s belongings, not your personal property. If you ever want to sell those business assets down the road, you’ll have to do so through the LLC’s accounts and under the operating agreement’s terms — not your personal whims.

Considerations for Estate Planning with a Family LLC

A potential drawback to using a family LLC for your estate planning is that there are some formalities to uphold — but that’s only an issue if you’re not prepared. Let’s talk about some important considerations for your family LLC.

Understand the tax implications

For federal tax purposes, a family LLC isn’t treated any differently from a regular LLC. It’s still a pass-through entity by default, meaning the members report any income or losses from the family LLC on their personal tax returns at tax time. That’s for yearly income taxes.

There are also tax implications when membership is passed on to members of the family, as we’ve discussed above. It’s important to note that the taxable gift thresholds and estate tax levels are subject to change at any time.

Pick the right family members to serve as managers

To make the best use of your family LLC, you’ll likely operate as a manager-managed LLC so the child members don’t have management rights immediately. That management structure allows you to have one or more adult family members manage the LLC’s affairs.

There’s no set way to select who will be a manager for your family LLC (with the one exception that managers generally must be at least 18). But you should choose the right person for your family. Perhaps that’s you personally, or maybe you and your partner. Perhaps it’s you and a sibling. Or maybe you’ll appoint another family member who’s better at administrative tasks than anyone else.

The important part is that you choose the right people to manage the LLC.

Ensure compliance with state laws and regulations

States don’t have a separate category for “family LLCs.” In the eyes of the law, a family LLC is just a regular LLC. That means you’ll need to comply with state regulations, such as making annual reports, maintaining a registered agent, or even keeping a business license. In some states, you’re required to draft an operating agreement — which we recommend doing regardless of what state you’re in.

Failing to adhere to these regulations could compromise your family LLC’s personal asset protection. If you’re not sure what requirements are in your state, we recommend consulting with a business attorney.

Alternatives to Using a Family LLC for Estate Planning

Two of the most common estate planning tools that might be used instead of a family LLC include trusts and wills. Sometimes large estates use a combination of all three methods.

Wills

A will is the most common, simplest form of estate planning. It’s a legal document that details how an individual’s assets will be distributed. Most commonly, the testator (the person writing the will) dictates which family members will receive which assets. A significant advantage of a will is its simplicity; you don’t necessarily have to get a lawyer’s help to write one. Your will might even still be valid if you wrote it on the back of a receipt and signed it.

That said, if your loved ones receive assets from your estate through a will, they’ll be subject to inheritance taxes, which they pay themselves. Depending on the size of your estate, those taxes can be pretty substantial.

Trusts

A trust is a legal arrangement between three or more parties: the grantor, the beneficiary, and the trustee (it can be just two parties if you appoint yourself as trustee for a living trust). There are a lot of types of trusts, but generally, the grantor tasks the trustee with the fiduciary duty to administer and manage the money and assets that will go to the beneficiary. The trust typically describes how and when the beneficiary can receive that money.

Trusts are commonly used for descendants who are minors, but that’s not their only use. Money within a trust is often taxable, and some trusts even need an EIN (Employer Identification Number) because they’re regarded as separate legal entities. If you decide to use a trust, you’ll need to get legal assistance.

We can help!

If you’re ready to start a family LLC to facilitate your estate planning, we can help. We can’t be your estate planner, but we can help you form an LLC in your state for $0. We can also help you maintain a registered agent and stay compliant each year. Let us help with the red tape so you can focus on what really matters: your family’s financial security.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

Family LLC Estate Planning FAQs

  • A drawback to a family LLC is that it’s really only advantageous to large estates that exceed the $12.9 million standard deduction for the estate tax. Another is the fact that an LLC comes with some corporate formalities that must be maintained.

  • Putting property into an LLC makes it the LLC’s property. It’s generally protected from your personal financial woes. Likewise, your personal assets are typically protected from any legal or financial trouble that happens to the LLC.

  • The primary difference between a family LLC and a family limited partnership is who holds liability for the business. In a limited partnership, one or more family members would hold the position of general partner and manage the business affairs. The general partner would hold unlimited liability for the business’s debts. Other partners of the business are limited partners, and they’re only liable in proportion to how much they invest in the company. The limited partners are usually children of the general partners and have no say in how the business is run.

    A limited liability company generally affords more limited liability protection since all LLC members are protected by the corporate veil.

  • If you gift a membership percentage in your LLC to one of your kids, you can usually deduct a substantial amount from its market value. That’s because most family membership interests are non-managing interests, which aren’t as valuable on the investment market. You probably couldn’t sell the membership interest to a third-party investor, so the IRS lets you deduct some of it for estate tax purposes.

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