By: David Barker, J.D.
Families may use many different estate planning strategies to eliminate or, at the very least, significantly reduce estate taxes. These strategies ensure that a family's wealth is passed on to the next generation, while at the same time effectively preventing the next generation’s spouse from claiming ownership without involving the burdensome and awkward pre-nuptial agreement. One such strategy involves transferring business interests and/or specifically identified real estate assets to the family through the use of a limited liability company (LLC). Once you’ve formed an LLC and have transferred your business interests and/or real estate assets into the it, the parents may then transfer to their children discounted units/ownership interests in their LLC, without giving up control of the business and/or the real estate asset.
You may use the LLC to accomplish these family goals, and, as an added safe money value. all of the LLC owners will have limited liability for the business's and asset’s debts. The LLC also provides management flexibility in that the LLC may be structured as a "member-managed" entity, wherein all of the owners participate in management, similar to the partners in a general partnership. However, the LLC may also be formed as a "manager-managed" entity, wherein the owners who are also the managers control the business, while the owners who are not managers act in a capacity similar to limited partners. In short, the "manager-managed" LLC is well suited to accomplish valuable estate and pre-marital planning objectives.
“So,” one may ask, “where does the rubber meet the road? It sounds like a great theory, but how may the non-business owner use this tool?” I am married with two daughters, ages 16 and 19, and I have implemented such a plan by acquiring a second home (“Vacation Home”) in Sanibel Island, Florida, and placing it in an LLC, whereby the four of us (husband, wife and two daughters), as members of the LLC, each hold a 25% interest in the real estate asset. The Operating Agreement places management in the hands of my wife and me (the Parents) and places restrictions on the assignment and/or transfer of a member’s interest to only a descendant of the parents.
A transfer to this LLC will protect the present and future members from certain liabilities and will provide for more effective use, administration, and maintenance of the Vacation Home, including the rental thereof from time to time, and any future investments and reinvestments to be held and invested by the LLC. A member may wish to convey some or even all of his interest in the LLC to members of his family during his life so as to provide a vehicle for the more efficient and harmonious use and management of the LLC and other properties and investments which may be held by the LLC from time to time. This tool provides an estate planning mechanism and effectively precludes a spouse of the next generation from having an ownership interest in the Vacation Home. Consequently, the LLC has become a Safe Money Place for the parents’ family wealth.