If you want to safeguard your assets and properties, it’s important to have a solid estate plan that includes various tools tailored to your needs. One such tool is a limited liability company (LLC) that owns some of your accounts and property. Here are some key things to know before adding an LLC to your estate plan:
What is an LLC?
An LLC is a business structure that can own many types of accounts and property. The LLC is owned by members who contribute money or property to the LLC. You can have a single-member-owned LLC or a multimember-owned LLC. If there is more than one member, management of the LLC can either be carried out by each member or the members can elect a manager.
What can an LLC own?
An LLC can own various types of accounts and property. Besides businesses, LLCs can own real estate (such as a second home, rental property, or a family-owned property), investments (allowing multiple people to pool their money and invest it with a larger volume), and expensive and risky property such as airplanes and boats.
Why should you consider using an LLC in your estate plan?
There are two main reasons to consider using an LLC in your estate plan: asset protection and probate avoidance. The LLC’s creditors can only go after the LLC’s money and property, not the member’s personal accounts or property. Also, the LLC avoids the public, costly, and time-consuming probate process. Anything owned by the LLC, either retitled into the name of the LLC during your lifetime, bought by the LLC, or transferred by operation of law at your death, will not go through probate. However, if you own a membership interest in your own name, the transfer of the membership interest at your death may need to go through the probate process.
How can an LLC be used in an estate plan?
To use an LLC in your estate plan, 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 at your death. Once created, you may also purchase property or create accounts in the name of the LLC. You will be a member as the creator of the LLC, and depending on the number of members and the type of management, may also manage the LLC. If you are married, your spouse may also be a member. You can also add other people as LLC members. However, adding members who do not contribute their own money or property to the LLC may have gift tax consequences.
Operating Agreement
Most LLCs have an operating agreement that outlines the rules for managing and transferring a member’s interest in the LLC. The agreement should include details such as who the members of the LLC are, the percentage of ownership that each member has, how conflicts among members are settled, any restrictions on a member’s ability to transfer their membership interest (including transfers to a trust), and what happens to each member’s interest if they die.
Trust Agreement
To provide an additional layer of protection, you may choose to transfer your membership interest in an LLC to a revocable living trust. As the creator, trustee, and beneficiary of the trust, you would still be able to participate in the management of the LLC and benefit from the LLC, you would just do so as the trustee of the trust and not as an individual. Because the trust owns the membership interest, transfer of the membership interest will not require probate. The trust can continue to own the membership interest after your death, and you can include instructions that allow a successor trustee to handle LLC matters on behalf of the trust’s beneficiaries. Alternatively, you could state in the trust instructions that the membership interest be distributed to a named beneficiary at your death.
Overall, incorporating an LLC into your estate plan can provide asset protection and avoid the probate.