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Family Limited Liability Companies (Family LLCs)

Family Limited Liability Companies (Family LLCs), are a hybrid of a business entity and an estate planning technique. Family LLCs are preferable over revocable trusts for estate planning because Family LLCs offer asset protection, and tax advantages over a revocable trust.

Family LLCs are becoming more popular for estate planning and asset protection purposes.

Family Limited Liability Company (Family LLC) Tax Advantages:

(1) Family LLCs may be used to lower estate and inheritance taxes, if properly structured, by taking advantage of discounting of interests for tax purposes. This is a very complex area, and will require an accountant, but you can lower estate and inheritance taxes due on your otherwise taxable estate if your assets are held within a Family LLC.

(2) Multi-member Family LLCs (limited liability companies owned by more than one individual - in this case all of your family members) are considered "partnerships" for Internal Revenue Service purposes and business owners may simply report the income on their Schedule K-1 form at tax time. In operation, the taxation of a multi-member LLC is the same as a partnership. However, you still retain the liability protection of an LLC.

(3) Revocable trusts generally do not provide estate tax or inheritance tax advantages.

Family Limited Liability Company (Family LLC) Asset Protection Advantages:

(1) Family LLCs, if properly structured, may prevent a creditor of yours from attaching a judgment to the Family LLC's assets. This means that any personal creditor of yours will not be able to easily seize the Family LLC's assets to satisfy the judgment. Similarly, creditors of your children will not be able to easily seize the Family LLC's assets to satisfy the judgment. A Family LLC can protect assets across generations, if properly structured.

(2) Revocable trusts do not provide asset protection for you or your children.

Family Limited Liability Company (Family LLC) Estate Planning Advantages:

(1) Aside from tax savings and asset protection, Family LLCs are also used for estate planning to pass assets from one generation to the next. Assets can be held within the LLC in perpetuity. This will allow future generations to receive the assets with maximum tax savings and asset protection along the way.

(2) Family LLCs are generally operated privately, outside of the probate process when an individual passes away. This means that the underlying assets of the Family LLC are not filed at the courthouse and no one from the public can view the Family LLC's assets.

(3) Since the Family LLC is the owner of the assets, investments may be continued without interruption upon the death of any individual. The other members of the LLC may wish to leave the investments where they are or invest elsewhere. In the probate process, they may have less choices.

Common Family Limited Liability Company (Family LLC) Mistakes:

(1) Creating Family LLCs is very complex and requires much more than completing a simple, fillable form. While an LLC can be created by filling out a simple form and filing it with the State, a Family LLC is much more complex. Creating an LLC is very state specific, and even creating an LLC in Maryland is different than creating an LLC in Pennsylvania. The Family LLCs created by the Proy Law Firm are offered in both Maryland and Pennsylvania, along with the operating agreement (see #2 below).

(2) While creating the Family LLC is the first step, the operating agreement is the document that provides the estate tax savings, inheritance tax savings, and asset protection. Operating agreements are internal documents that control how an LLC operates. Think of this as a document similar to a corporation's bylaws or a partnership's partnership agreement. It is absolutely crucial that the operating agreement is properly drafted to take advantage of estate tax and inheritance tax savings, as well as asset protection. For example, Family LLCs may be "member-managed" (the Family LLC is managed by its members) or "manager-managed" (the Family LLC is managed by a group of managers). If your operating agreement does not properly structure the Family LLC's management, your LLC will not offer maximum, if any, asset protection or tax savings.

(3) Operating the Family LLC without an accountant. What sets a Family LLC apart from a revocable trust is that the Family LLC is a business, and as such requires the services of an accountant for proper bookkeeping. While I am not an accountant, I work closely with accountants in ensuring that Family LLCs are operated properly.

(4) Not involving the next generation with the Family LLC. While Wills are still necessary, Wills are often placed in a location for the next generation to discover upon your passing. Not much involvement is required by the next generation to receive your assets through your Will. However, with a Family LLC, you are operating a business. To ensure that all of the advantages of the Family LLC are maximized, the next generation, at an appropriate age and maturity, should be involved with the Family LLC, just as any other family business. Without involving the next generation in operation of the Family LLC, the next generation may be at a loss as to the Family LLC's accounting requirements, legal requirements to maintain the Family LCC, and the operation of the Family LLC (usually managing investments).

The Proy Law Firm can Help you Establish your New Family Limited Liability Company (Family LLC):

Contact us as any time if you are thinking about establishing a new family limited liability company (Family LLC).