Five things to know before including a limited liability company in your estate plan

Protecting your hard-earned money and property is no joke.

You don’t want to be caught off-guard by any unexpected legal issues that might arise.

Luckily, there are several tools at your disposal to help you safeguard your assets. One such tool is a limited liability company (LLC) which can be used to own some of your accounts and property. With an LLC, you can breathe easy knowing that your assets are safer and more secure.

What is an LLC?

LLC is a fancy acronym for a “limited liability company,” which is a business structure that can own all sorts of accounts and property. The cool thing about an LLC is that it’s owned by members who can contribute money or property to the LLC. So, you can have an LLC with just one owner or multiple owners. If you have multiple owners, you can either each handle management of the LLC or elect a manager to do it for you.

And get this — an LLC can own all sorts of things! It’s not just for businesses. For example, if you’ve got a second home, rental property, or heirloom property that’s been in your family for generations, an LLC can own it. If you’re feeling adventurous and want to own something expensive or risky, like an airplane or a boat, an LLC can take that on, too.

Why should I consider using an LLC in my estate plan?

Asset Protection

When you form an LLC, it’s considered a separate entity from you personally. This means that if someone sues your LLC and wins, they can only go after the LLC’s money and property – not your personal accounts or property. That’s a good thing, right?

But here’s the catch: in some states, if you’re the only member of the LLC, you might not get the same protection from your personal creditors. The idea behind this is that your creditors should be able to go after your LLC interests to satisfy their claims because there’s no one else that will be negatively impacted by the seizure of the LLC’s money and property.

It can get a little confusing, so it’s always a good idea to talk to a lawyer to make sure you’re taking the right steps to protect your assets.

Probate Avoidance (underlying assets)

When you have an LLC, any accounts or property that are owned by the LLC, either by being retitled into its name during your lifetime, bought by the LLC, or transferred by operation of law at your death, won’t have to go through the probate process. That’s because the probate process only deals with the transfer of accounts and property that you owned at the time of your death. With an LLC, the ownership of accounts and property belongs to the LLC and not you personally. However, if you own a membership interest in your name, then the transfer of that interest after your death may need to go through probate. It’s important to keep this in mind when considering your options for estate planning and probate avoidance.

How can an LLC be used in an estate plan?

How It Works

So, let’s say you want to create an LLC to protect your assets. You can start by transferring your accounts and property to the LLC during your lifetime or naming the LLC as the beneficiary of your accounts and property when you pass away. You can also buy property or create accounts in the name of the LLC once it’s been created. As the creator of the LLC, you’ll be a member, which means you own an interest in the LLC. Depending on the management type and the number of members, you may also manage the LLC.

If you’re married, your spouse can also be a member, and you can add other people as members either when you create the LLC or later. Just keep in mind that there may be gift tax consequences if you add members who don’t contribute their own money or property to the LLC.

Once the LLC is created, it becomes the owner of the accounts and property, and it operates as a separate entity from its individual members. This separation allows for some level of asset protection, which can be helpful if you ever face legal or financial troubles.

At your death, the only thing that may need to be transferred is your ownership interest in the LLC. The accounts and property owned by the LLC will remain owned by the LLC, and the LLC can continue to operate with the remaining members. This can help avoid the public, costly, and time-consuming probate process that typically applies to accounts and property owned by an individual at the time of their death.

Operating Agreement

When you form an LLC, you’ll typically want to have an operating agreement in place. This agreement sets out the rules for managing the LLC and transferring a member’s interest in the LLC. If you don’t have an operating agreement or need to update it, it’s a good idea to reach out to a business law attorney who can guide you through the process.

Some of the key provisions that should be included in your LLC’s operating agreement are who the members of the LLC are, the percentage of ownership that each member has, and how conflicts among members are settled. You’ll also want to consider any restrictions on a member’s ability to transfer their membership interest (including transfers to a trust), as well as what happens to each member’s interest if they pass away. In most cases, whatever is stated in the operating agreement will control the distribution of a member’s interest upon their death.

Trust Agreement

If you want an extra layer of protection for your LLC, you can transfer your membership interest to a revocable living trust. This way, you can still be involved in the management and benefits of the LLC, but as a trustee of the trust rather than an individual. Since the trust owns the membership interest, transferring it won’t need probate because the trust doesn’t die. The trust can continue to own the membership interest even after you die, which you can specify in the trust’s instructions. You can also name a successor trustee to handle the LLC matters for your beneficiaries, or you could have the membership interest distributed to a specific beneficiary at a certain time in the future. Either way, you’ll have more control and protection over your LLC.

Best Practices for Using an LLC

As a business owner, you don’t want to miss out on the benefits of having an LLC, so it’s important to play by the rules. While it may seem tedious, following the formalities is critical to maintaining the separate legal identity of the LLC. This includes filing annual reports with the state government and keeping accurate records of all transactions and meetings involving the LLC. It’s also crucial to keep your personal finances separate from the LLC’s finances. Don’t treat the LLC’s bank account as your own personal piggy bank, or you may risk losing the protection that the LLC provides. So, stay vigilant and keep things separate to ensure the success and longevity of your LLC!

What are my next steps?

We get it — thinking about estate planning isn’t exactly the most thrilling topic of conversation. But trust us, it’s important! We want to help you protect all that hard-earned money and keep your loved ones taken care of. Plus, we promise to make it a fun and stress-free experience (as much as estate planning can be, at least). So if you’re ready to explore how an LLC can benefit your future plans, drop us a line!

Fine Print

LLCs are required to file as a reporting company with the SEC if they meet certain eligibility requirements under the Securities Exchange Act of 1934. Specifically, an LLC must register as a reporting company if it has 500 or more members, or if it has $10 million or more in assets and at least one class of equity securities that is held by 2,000 or more people or 500 or more non-accredited investors. In addition, LLCs that have publicly traded debt or that have a class of securities that is listed on a national exchange are also required to register as reporting companies with the SEC.

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