When people begin drafting their estate plan, they often debate who to give their personal assets to after they pass away. Often, these assets include real estate, monetary funds and sentimental items. For those individuals who worry about gift and estate taxes and want to pass their assets onto their children, they should consider creating a limited liability company—called an LLC. While LLCs are often used for small businesses, they have tax and other financial advantages. Below are so common questions and explanations about including an LLC in an estate plan.
What Is an LLC?
A Limited Liability Company, or an LLC, is a popular type of business structure that protects owners from most legal liability, like a corporation. This means LLC owners are typically not liable for debts incurred by the LLC business—meaning personal assets like personal bank accounts cannot be collected. However, LLC owners do report income and losses from the company on their personal tax returns.
How Can I Include an LLC in my Estate Plan?
For individuals with large estates who are worried about taxes but want to pass their assets onto their children, attorneys will often advise them to create an LLC. To include an LLC in an estate plan, parents and children create the LLC together and transfer assets into it. These assets often include monetary funds and real property. The parents are then made managing members of the LLC; this allows them to have control over the assets. Then, the parents will transfer assets in the LLC to their children—often named non-managing members of the entity.
What Are the Benefits of an LLC?
There are tax benefits to forming an LLC. First, it allows parents to give their children more assets from the LLC without reaching the lifetime gift limit. Currently (2021), there is a $11.7 million lifetime gifting limit; if an individual gifts more than this amount in their lifetime, they must pay a tax. When the assets in the LLC are transferred to children, they receive a discounted tax rate of 40%. Thus, the asset is taxed at 40% less than it would be otherwise. This also allows the parents to gift their children more assets without reaching the gift tax exclusion limit.
Additionally, LLCs provide the benefit of reducing the parents’ estate total—increasing the chance they will be able to avoid paying the estate tax. In 2021, if an individual’s estate is valued at more than $11.7 million, there will be a 40% tax their estate will be forced to pay after they pass away. By gifting their children some of their estate through the LLC structure, they are able to reduce the size of their estate to hopefully not be subject to the estate tax.
Because LLCs are legal entities and can have long-term benefits for families, individuals considering forming an LLC should reach out to an experienced attorney.
Contact a Houston Estate Planning Attorney
If you or a loved one is interested in creating an LLC and including it in your estate plan, the attorneys at McCulloch & Miller, PLLC are here to help. We understand that Houston estate planning may seem complex and overwhelming—we are here to demystify the process and create a plan that works for you and your family’s needs. To schedule a consultation, give us a call today at 713-333-8900.