Creating a Family LLC for estate planning can help transfer assets to younger generations while avoiding gift and estate taxes. However, compliance with state requirements is crucial. Alternatives like making large gifts or covering medical and tuition expenses can also help reduce estate taxes.
For those families with large estates, an LLC can be used to pass assets to children without being subject to gift and estate taxes. Typically, a family LLC would be created among higher-bracket, older-generation taxpayers to lower-bracket, younger-generation taxpayers. Within a family-owned LLC, property from one or more individuals would be transferred into the LLC and titled in the LLC’s name for the common benefit of the family members.
In 2022, the official estate and gift tax exemption will be $12.06 million per individual for individuals who die in 2022, a raise from the $11.7 million exemption in 2021. A couple will be able to shield $24.12 million. The annual gift tax exclusion amount will also rise from $15,000 to $16,000 in 2022. The IRS announced these new inflation-adjusted numbers in Rev. Proc. 2021-45.
In order to form a family LLC, the senior family members, either the grandparents or parents, would transfer some of the assets they own into the family LLC in exchange for being made Members, allowing them to retain ownership interest over the assets retitled in the name of the LLC. However, the parents or grandparents would also be named Managers under the operating agreement so that they retain management control over any income distributions.
Generally, the initial capitalization of the LLC is a tax-free event. The LLC interests would then be gifted or sold by the original Members, parents or grandparents, to the junior family members, the children or grandchildren, for the junior family members’ benefit.
If you don’t follow the explicit requirements in your state for incorporating an LLC and managing an LLC, such as holding annual meetings, keeping meeting minutes, and ensuring your personal finances are kept completely separate from your business finances, you could potentially lose all the property kept in the LLC in a single lawsuit. This is because a lawyer could potentially “pierce the corporate veil” and be able to show that you and your family are simply using the LLC for liability protection while still treating the LLC like personal property.
Estate tax is assessed at 40% on the largest estates. However, by transferring some of your estate earlier to your heirs or elsewhere, you can avoid subjecting your heirs to estate tax upon your death. To do this, you should make large gifts, e.g., in the millions, in order to lower your final estate under the $12 million exemption amount.
You can also make many $16,000 annual exclusion gifts which won’t count against the $12 million limit. Both you and your spouse can do this to as many individuals as you like – your children, grandchildren, or each of their spouses. You and your spouse can also pay medical and tuition expenses for other individuals with no estate or gift tax consequences.
In conclusion, estate planning strategies are diverse and tailored to individual circumstances. While a family LLC can facilitate the transfer of assets across generations, it requires strict adherence to state regulations. Alternatives such as gifting, covering medical and tuition expenses, and staying informed about current estate and gift tax exemptions are valuable in mitigating potential tax burdens. To explore your estate planning options or for more information, please contact us at +1 (307) 683-0983 to consult with our knowledgeable Business Success Advisors.