How Limited Liability Companies Can Help with Estate Planning

By Jennifer Reuting

LLCs (limited liability companies) are the perfect tool for planning an estate. Planning your estate is sort of like shooting at a moving target — you can’t plan for a future that you are unsure of. Nothing is certain in estate taxes, and Congress may pass another tax act in the coming years that changes the estate tax structure. So who knows what the tax rates will be when you pass on?

You need to take control of your estate and not leave everything up to the fickle whims of the U.S. government. With LLCs, you maintain control of your assets as the ownership passes on to your heirs, all while avoiding probate. You can also rest assured that your estate is protected from the roving eye of creditors and lawyers who want to take it away.

LLCs avoid probate

One of the greatest benefits of using LLCs in your estate planning is that your heirs can avoid probate, a lengthy and expensive process in which the court settles your estate for you. The court resolves all creditors’ claims and distributes your assets according to law or your will (if you recorded one). Probate is managed by someone whom you designate in your will, called an executor.

Probate often undermines all the tax-saving steps that you take (such as gifting) because the legal fees and court costs can become so high that the taxes are nominal in comparison. And if someone contests the will or the executor, the courts can take many years to execute the will, and there may not be much of an estate left to divvy up after it’s all over.

When you set up your estate in an LLC, the LLC just transfers to your heirs, and all is said and done. This way, you can rest assured that your loved ones won’t be hit with any huge legal fees that eat up your estate before it’s ever delivered into their hands.

If you are married and live in one of the ten community property states (Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), all your assets will be transferred to your spouse upon your death. In this case, no probate is necessary. If your spouse is no longer alive, then your estate will enter into probate. Note: if you don’t live in one of these community property states, then your estate will enter probate whether your spouse is alive or not. The best way to avoid probate is to create an LLC.

LLCs provide asset protection

The biggest problem with most estate planning techniques is that as you collect assets to pass on to your heirs, the assets aren’t protected from creditors and lawsuits. As long as you’re alive, without this protection, you’re a walking target. Although most trusts help ease the transfer of your assets upon your death, they don’t protect your assets from lawsuits or creditors like an LLC does.

When you work with your attorney on an asset protection plan, he will probably suggest using a trust. (A trust is a legal situation where someone gives financial control over certain assets to a person or institution for the benefit of another person, the beneficiary.) When structured properly, LLCs offer the same benefits as trusts when it comes to avoiding probate and reallocating income, but many attorneys prefer trusts because they’re the standard, age-old way of estate planning, and LLCs are newer entities. If you find this to be the case, you may want to have an open and frank discussion with your attorney as to why he doesn’t wish to incorporate an LLC into your estate plan. If he doesn’t have a concrete reason — such as the value of your estate is so small that it wouldn’t warrant the extra fees — then you may want to get a second opinion.

When you meet with your attorney to draw up an estate plan, make sure that your attorney incorporates asset protection strategies into the plan. Preventing your assets from being taxed after your death is pointless if your assets get seized by a creditor before your heirs can even get to them. An LLC, if used by itself, should do the trick because it offers many layers of asset protection.

If you want to use a special trust in your estate planning endeavors, you can use an LLC (or two or three) to hold the assets, thereby protecting them from creditors. The trust will be the majority owner of the LLC to help avoid probate and reduce estate taxes. This way, if you get sued personally, the creditor can break the trust, however, the assets (which are inside the LLC) are saved by the LLC’s charging order protection.

When you work with your estate planning attorney, he may not look at the situation from an asset protection perspective. Or, he may look at it only from an asset protection perspective and ignore the tax implications. Make sure that you have all of your bases covered and that whomever you work with looks at both of these important aspects when planning your estate.

LLCs give you control

An LLC is incredibly flexible. You can structure the ownership, the management, and the profit allocations pretty much however you want by specifying these things in the company’s operating agreement. Your LLC can be either member-managed, where all partners share equal control of the day-to-day affairs, or manager-managed, where one or a few people (who don’t make up 100 percent of the partners) make managerial decisions. LLCs for estate planning are commonly manager-managed LLCs, with the parents taking the role of managing partners and the kids as nonmanaging (silent) partners. This way, as the LLC is transferred to the children, the parents can still manage the assets even if they no longer own the LLC.

Basically anything goes, as long as you set up the LLC’s operating agreement accordingly. You can have different types (classes) of membership, where some partners have more voting rights than the others. You can restrict the transfer of ownership so your kids can’t sell their shares in the family estate. You can describe in detail how you want the succession to go after you pass away, and you can name the successor managers. You can even distribute the profits and losses however you want, meaning they don’t have to be distributed according to the membership percentages.