Limited liability companies can protect your personal assets if you own a business but they can also be used in estate planning. Specifically, you could establish a family LLC to shield assets from creditors while ensuring a smoother transfer of wealth from one generation to the next. Family LLCs are subject to the same rules and regulations as non-family LLCs, and there are other reasons that might make a family LLC the right decision for you. It’s helpful to understand how they work when deciding if one is right for your financial situation. A financial advisor may be able to help you figure out whether a family LLC makes sense.
What Is a Family LLC?
A family LLC is a limited liability company that’s established by members of the same family. Participants in a family LLC must be related to one another by blood, marriage or through adoption. Typically, one family member manages the LLC. Like a non-family LLC, there has to be an operating agreement in place that spells out:
- Ownership rights for each member of the LLC
- Transfer rights
- Day-to-day operations and activities
The family can create the operating agreement for the LLC or they can have a business attorney draw one up for them. Having this operating agreement in place is important because it offers some key protections. Specifically, an operating agreement for a family LLC can:
- Protect assets if you’re sued by one or more creditors
- Discourage creditors from trying to upset the operation of your limited liability company
- Make it difficult for creditors to derail your business operations by attempting to attach assets belonging to the LLC
The operating agreement can also prevent members from doing things that could affect the LLC’s status. For example, members wouldn’t be allowed to terminate one another in an attempt to dissolve the company without the consent of all its owners and management.
Family LLC in Estate Planning
Setting up a family limited liability company can offer asset protection against creditors but it can also play an important part in estate planning for business owners. They can be used to minimize estate taxes for families that have substantial assets.
The IRS makes it possible to discount valuations for assets that are protected by a family LLC. This can allow you to transfer more of your estate to your heirs before you’re in danger of reaching the estate tax thresholds.
For 2023, the estate tax exemption rose to $12.92 million for individual filers and to $25.84 for married couples filing jointly. That’s up from 2022 levels of $12.06 million for individual tax filers and $24.14 for married couples filing jointly. This means you can leave these amounts to heirs and pay no federal estate tax or gift tax. Meanwhile, the annual gift tax exclusion limit for 2023 is $17,000 for single filers or $34,000 for married couples filing jointly.
A family LLC can help you to better pace out transfers of wealth during your lifetime in order to make the most of these exemption and exclusion limits. Additionally, you can structure a family LLC so that members are restricted from transferring any of their interests outside the family. This may be important to you if you’re hoping to create a last legacy of wealth for future generations.
Family LLC vs Family Limited Partnership
A family LLC is one way to manage business ownership among family members; a family limited partnership or FLP is another. With a family-limited partnership, you have both general partners and limited partners. The general partners control the management and investment decisions of the business while the limited partners are able to benefit financially from the success of the business.
In a typical family limited partnership structure, the older members of the family (i.e. the founders or their immediate children) may be the general partners while the limited partners are members of the younger generations. The purpose of a family-limited partnership is to make it easier to pass on a business to the next generation and maintain business assets in the family.
Family limited partnerships can offer some estate tax planning benefits when passing on assets to heirs. But in terms of the liability protection that’s afforded, this only extends to the limited partners. A family LLC, by comparison, would offer more comprehensive liability protection for all members of the limited liability company.
Family LLC Pros and Cons
There are several advantages associated with establishing a family LLC. In terms of the positives, here are some of the reasons someone may consider a family LLC:
- It can offer asset protection from creditors beyond what’s available with a corporation or partnership.
- A family LLC can simplify the transfer of business assets to the next generation.
- It can also prevent assets from being transferred outside the family, making it easier to preserve a legacy of wealth.
- The pass-through entity nature of family LLCs can allow for preferable income tax treatment.
- They can allow families to minimize estate tax and gift tax when passing on assets to heirs.
On the other hand, a family LLC may not be right for everyone. Here are some of the chief limitations to know:
- They’re generally not viewed as a suitable vehicle for passing assets on to minors.
- Commingling personal and business assets could become problematic.
- The IRS tends to scrutinize the formation and activity of family LLCs to ensure that they’re not created simply for the purpose of evading taxes.
Cost is another consideration when weighing a family LLC. It can easily cost several thousand dollars to create a family limited liability company after you pay registration and filing fees and a business attorney’s fee. So before spending the money, it’s important to understand the purpose it will serve for you and your family to ensure that it’s worth it.
The Bottom Line
A family LLC could be a useful tool for both running a family business and managing your estate plan. You may choose this option over a family-limited partnership if you’re looking for broader asset protection. Whether investing time and money into creating and maintaining a family LLC makes sense for you, however, can depend on the nature of the business and the value of assets you’re trying to protect.
Tips for Estate Planning
- A financial advisor can be a huge help in the estate planning process. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have free introductory calls with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- A well-rounded estate plan can include things other than a family LLC. For example, you may want to establish one or more trusts to hold personal assets on behalf of your beneficiaries. Different types of trusts can serve different purposes, including charitable giving and asset protection.
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