The Benefits of Setting Up a Family LLC for Your Real Estate
Aug 17, 2023
A limited liability company, known as an LLC, is an entity that is legally somewhere between a partnership and a corporation. However, it is also used as a legal structure to pass assets, like real estate, from one person to another as in the case of a family with heirs. It is a legal entity that benefits from the limited liability as would a corporation but has the flexibility in both operations and management enjoyed by a partnership. It is recognized in all 50 states (but different states have varying laws pertaining to a family LLC). All members of an LLC are protected from personal liability lawsuits, cases of debt, and claims against them personally as in the case of a corporation. In other words, it’s a way to protect the personal investments of the LLC members, like their automobiles, homes, or other real estate or personal bank accounts from legal action against the entire company.
While it operates in much the same way as a corporation legally, an LLC is actually more beneficial in that it allows the members of the group to act as they like. It also comes along with fewer formalities and state regulations when compared to a corporation setup. A family limited liability corporation is a specific type of LLC formed by a group of family members allowing them to conduct business as an LLC. Members of the LLC have to be related by marriage, blood, or even through adoption. It is a great way for many families to protect the assets of the family business. Consequently, it is used in estate planning as a way to protect real estate and reduce the tax burden on those who inherit the assets.
Benefits of Setting up a Family LLC for Your Real Estate
You have worked hard throughout your life amassing assets such as real estate and other investments. You want as much of what you have earned as possible to stay with those you love after you depart. An LLC is an appealing legal way to do this because it ensures that it is done above board and in concurrence with the state laws, and at the same time it's easy to start an LLC and run it, compared to a corporation for instance. The following are just a few of the many benefits to consider as you determine if this is the right estate planning move for you:
Reduce Estate Taxes
When you pass assets to your children after your death, they will have to pay estate taxes on whatever they receive. Thankfully, if you instead set up a family LLC before you are gone, it will greatly reduce the amount of estate taxes they will be forced to pay. The IRS allows you to discount valuations of assets when they are part of a protected family LLC. What this means practically is that you can transfer a greater amount of your estate to your heirs without going over the thresholds for estate taxes.
To give you an idea of what that could mean practically, please note that the estate tax exemption rate in 2022 was $12.06 million for individuals and $24.14 for married couples. For 2023, this number is $12.92 million for individuals. This means you can leave this amount of assets to heirs without paying federal estate taxes. It’s interesting to note, though, that the annual gift tax exclusion limit increased in 2022 to only $16,000. Suffice it to say that using a family LLC to transfer real estate and other wealth while you are alive instead of giving it as a gift and subjecting it to that much smaller tax threshold will help your heirs get the most out of the exclusion and exemption limits and therefore, reduce the tax burden on them after you have passed on. Keeping this in mind, it is probably best to consult with a tax expert on this and see what will best suit you taking into consideration your needs and circumstances.
You Maintain Control
Another benefit of setting up your estate plan with a family LLC is it allows you to maintain control over your assets. You would remain a management part of the LLC as the head with your children and perhaps grandchildren holding shares in your LLC. This means that you can trade, sell, buy, and distribute assets as you desire as well as being able to withdraw from the company and even transfer membership within the company. The benefit of this setup means that you can maintain control and protect assets from decisions made by younger members. This gives you the freedom of deciding where your assets will go, whom they will go to, and how they will be distributed, while staying in complete control of your assets until you are gone.
A family LLC is a way to shield your assets from creditors’ claims as briefly touched on above. As part of an LLC, each member is limited in terms of their debt liability, which is a huge benefit of this legal agreement. This means that after the assets are transferred, or even within the lifespan of the person who set up the LLC and serves as the manager, other people who are members cannot be legally pursued due to defaults by the company as a whole. In other words, no creditors can go after the members on a personal basis due to company debt. In this way, it protects assets against debts that might remain after a loved one passes away.
Allows You to Transfer a Variety of Assets
Another notable benefit of utilizing a family LLC for your estate is making transferring a variety of assets possible, not just real estate. While property is one big factor sure, you can also transfer personal possessions like stocks, artwork, vehicles, etc, as well as cash through your LLC to your members. Therefore, this is a great way to divide out an entire estate’s worth of assets without it becoming too complicated. If your estate is substantial, then being able to transfer a wide variety of assets to several members has its benefits to be sure. In addition, in many states, you can set up your LLC itself to transfer to another individual upon death. This prevents the LLC from just dissolving upon your death and then having to go through court to determine a succession plan.
Give to Your Family
While a family LLC cannot include a personal residence, it can be a great way to give assets and other real estate to your heirs. This setup and legal agreement ensure that you have the ability to give your real estate to the members of your family, whom you choose, without them facing any legal ramifications from others who might want to take these assets from them or lay claim to them. Sadly, in the real world families fight each other for assets more often than not, and having assets legally protected and going to certain members of your family you have chosen gives you a great deal of control and allows you to protect those family members even after you are gone.
Are There Any Drawbacks to Family LLCs?
While the benefits in most cases far outweigh the drawbacks of a family LLC to evaluate it fairly as an estate planning option, it’s important to consider why it might not be ideal. The main drawback of this type of legal arrangement is the fact that it can be costly to maintain. For example, depending on the state in question, for some family LLCs, there is not only a formation fee to get it started but ongoing fees to maintain the legal agreement. These fees can add up and end up costing several thousand. When compared to sole proprietorships, which have no required registration or associated fees, this can mean a more costly arrangement. However, if the real estate and assets within an estate are valuable enough, it can be well worth the fees and other issues associated with forming a family LLC to use this as an estate planning tool.
It’s Worth Doing, but Make Sure You do it Right
The bottom line when it comes to using a family LLC for real estate and estate planning is to do it right. It can be extremely beneficial, especially if a family’s assets or real estate would be valued higher than the tax limitations. It can also make it much easier for the owner of the assets to maintain control over their estate until they pass on. In addition, it’s a great way to pass along a variety of assets, not just real estate. However, you need the help of a skilled financial and legal advisor to ensure that you create your family LLC correctly and are getting the most benefits out of the arrangement. Estate planning is complex and states vary on their requirements and laws surrounding LLCs, so you must procure knowledgeable professionals to help you set this up. Once you talk to them, you can determine what an LLC would like for your family— such as the fees you could expect to pay and other factors. Then, you can make an informed decision on if it would be a good idea for you or if you would be better off handling your real estate assets differently. Either way, getting skilled help is vital to the process.