In safeguarding your assets, it’s crucial to have a strategy that fits your individual circumstances. One option that could prove useful is establishing a limited liability company (LLC) to hold some of your property and accounts.
What is a limited liability company?
An LLC is a type of business entity that has the capacity to possess various forms of assets and accounts. It is owned by its members who make contributions to the LLC in the form of money or property.
The LLC can either have a single member or multiple members. In the case of having multiple members, the management of the LLC can either be conducted by each member or a manager can be elected by the members.
What can an LLC own?
Although commonly thought of as a business structure, an LLC can have various advantages for ownership of different types of accounts and property, including:
● Real estate: An LLC can possess properties like rental properties, second homes, or properties that have been in a family for generations.
● Investments: Some situations may call for the creation of an LLC to allow several individuals to pool their funds and invest in larger volumes.
● Expensive and risky property: Items such as boats and airplanes can be owned by an LLC.
Why should I consider using an LLC in my estate plan?
Asset Protection
Asset protection is a key benefit of an LLC. As a separate legal entity, an LLC’s creditors can only access the LLC’s assets and funds, not the personal accounts or property of its members. Furthermore, with proper formalities in place, personal creditors of a member may not be able to reach the LLC’s accounts and property to settle the member’s personal debts.
However, it’s important to note that in some states, a single-member LLC may not enjoy the same level of protection from personal creditors.
Probate Avoidance
Another advantage of using an LLC is probate avoidance. Any assets owned by the LLC, whether retitled in the LLC’s name during your lifetime or transferred by operation of law at your death, will not need to go through the costly and time-consuming probate process.
This is because the LLC, not the individual member, owns the assets and accounts. However, if the membership interest is owned in the member’s name, it may still need to go through probate upon their death.
How can an LLC be used in an estate plan?
How It Works
Firstly, you create an LLC during your lifetime and transfer accounts and property to the LLC, or name the LLC as the beneficiary of your accounts and property upon your death. You may also acquire property or establish accounts in the name of the LLC after its creation.
As the LLC creator, you become a member of the LLC, and depending on the management type and number of members, may also manage the LLC. Your spouse can also become a member if you’re married, and you can add other members to the LLC later on.
However, keep in mind that adding members who don’t contribute their own money or property to the LLC may have gift tax consequences. The LLC functions as a separate entity from its members, which allows it to offer some level of asset protection.
Upon your death, the only item that may need to be transferred is your ownership interest in the LLC, while the accounts and property owned by the LLC will remain under its ownership.
Operating Agreement
The Operating Agreement is a crucial document that outlines the rules for managing and transferring an LLC member’s interest. If you have an LLC without an operating agreement or need to update an existing one, seek the guidance of an experienced business law attorney.
The operating agreement should contain provisions such as the identity of LLC members, the percentage of ownership each member holds, how conflicts between members are resolved, restrictions on transferring membership interests (including transfers to a trust), and the disposition of a member’s interest upon their death (usually governed by the operating agreement).
Trust Agreement
To provide an additional layer of protection, you can transfer your LLC membership interest to a revocable living trust. As the creator, trustee, and beneficiary of the trust, you can still participate in LLC management and benefit from the LLC. However, you would do so as the trustee of the trust rather than an individual.
Since the trust owns the membership interest, the transfer of the membership interest will not require probate, as the trust does not die. In fact, the trust can continue to own the membership interest after your death, as specified in the trust’s instructions, with a provision for a successor trustee to handle LLC affairs on behalf of the trust’s beneficiaries.
Alternatively, you could direct the distribution of the membership interest to a named beneficiary at your death or a specific time in the future. The beneficiary would then assume control of the membership interest.
Tips for Maximizing the Benefits of an LLC
In order to fully leverage the advantages that come with establishing an LLC, it is essential to comply with all the requirements and formalities associated with it. Since an LLC is a distinct legal entity, you must treat it as such, which entails adhering to specific procedures.
For instance, you need to file an annual report with the appropriate state government office, maintain detailed records of all LLC transactions and meetings, and ensure that your personal finances and assets are kept separate from those of the LLC. You should avoid using the LLC’s bank account for personal expenses.
Starting January 1, 2024, LLCs that qualify as reporting companies will be required to file a Beneficial Ownership Information Report with the Financial Crimes Enforcement Network of the Department of the Treasury. This report must include the full name, date of birth, address, unique identifying number, issuing jurisdiction, and image of an acceptable identification document for all beneficial owners of the LLC.
A beneficial owner is an individual who owns or controls at least 25% of the ownership interest in the LLC or exerts “substantial control” over it. For reporting companies formed after January 1, 2024, the company applicants must provide their full name, date of birth, address, unique identifying number, issuing jurisdiction, and image of an acceptable identification document.
A company applicant is either the person who files the formation document or registers the LLC to do business in the US (for foreign reporting companies) or the person primarily responsible for directing or controlling another person’s filing of the document.
What are my next steps?
We understand how important it is to protect yourself, your loved ones, and all that you have worked so hard to earn. Take control of your future today by contacting the Legacy Law Centers team for a complimentary consultation.
We help Loudoun County families and their loved ones prepare for the future through sound legal planning. Give us a call at (571) 200-5559 to learn how we can help you.