IT’S SMART TO ENGAGE YOUR ESTATE PLANNING ATTORNEY FOR GUIDANCE.
That LLC (Limited Liability Company) recommended by your accountant to hold a real estate interest or to hold a small business that you have is a good idea. But the planning doesn’t end there. Absent thoughtful discussion with your estate planning attorney (before or after setting up the LLC) there can be unintended consquences later.
The accountant explained that the LLC can be set up to be a pass-through entity for tax purposes, while still creating the all-important layer of limited liability for LLC Members (sometimes referred to as the “corporate veil of limited liability”). That’s right. And these are the primary catalysts for using an LLC.
With real estate, the LLC can convert a real property interest when the deed is transferred to the LLC into a personal property interest consisting of the Member Interest (think of shares, but we usually use percentage of ownership, rather than shares).
What’s the advantage? Most of all, the ease of transfer to spouse or children, or later for sale to others. With the LLC and proper planning a deed transfer of the real estate later is no longer required to essentially transfer the beneficial interest at that time.
But we have to be thoughtful when considering the use of the LLC in conjunction with your estate planning.
Will transfer the LLC Member Interest to your Living Trust? Will we use a form of Transfer On Death (TOD) registration so that the Member Interest goes to the surviving spouse or children or others immediately at death? Are there asset protection reasons to be considered that may drive a different approach?
There are management issues, too, so that activities for the LLC can continue without interruption using Powers of Attorney during incapacity of the Member, or by using thoughtful management or ownership techniques (think Living Trust) after the Member has passed away.
An equally important issue arises when the LLC has multiple Members and the operating agreement that guides LLC ownership issues is not reviewed and modified by the Estate Planning Attorney. Frequently overlooked is this important concept: The new LLC Member who takes their interest by Will or by Trust distribution does not automatically become a Member for other than distributional purposes. Unless proper planning is done, the transferee of the deceased Member’s interest does not step into the LLC for all management/control purposes.
We can imagine the surprise for the spouse or children of the original LLC Member who thought that they were going to step into the deceased Member’s role. We can also imagine the uncomfortable discussion between the spouse and children on the one hand and the accountant who recommended the LLC but didn’t recommend reaching out to the Estate Planning Attorney at the same time.
The thoughtful approach? Reach out to your Estate Planning Attorney to be sure to start the discussion. Don’t have one? Call or email to Attorney Marc Sherman: https://mshermanlaw.com/contact/
