An Estate Plan Should Include a Family LLC

June 20, 2022Filed Under: Asset Protection, Estate Planning

Limited liability companies (LLC) are legal structures that sit between partnerships and corporations. Most small business owners are aware this hybrid legal entity is beneficial for financial management, yet an LLC is also a powerful estate planning tool for much the same reason. In the case of estate planning, a Family LLC permits the transfer of assets to children, grandchildren, and other family members at discounted rates without being heavily burdened by gift or estate taxes. As part of your estate plan, an LLC can protect assets during your lifetime, keep them in the family, and reduce taxes you and your family owe.

Why Do I Need a Family LLC?

All fifty states recognize a Family LLC as a legal entity, although each state has regulations governing its formation, running, and taxation. LLC owners (members) receive protection from personal liability in the event of lawsuits, debt, or other claims. This protection shelters personal property like a home, bank account, investments, and even vehicles. An LLC is subject to fewer state formalities and regulations than a corporation, so members can manage in nearly whatever manner they prefer.

A financial threshold defines the need for an LLC to help lower estate taxes if the estate is more than $12.06 million in 2022. If your estate is below this threshold, your estate planning attorney can help craft an estate plan that focuses on trusts to limit the probate process and estate taxes. While there is no legal reason you cannot create an LLC with fewer means, a trust will not require Family LLC’s initial and annual fees and more intensive reporting procedures.

Establishing an LLC in conjunction with your children permits you to:

Maintain control over your assets while alive
Effectively reduce estate taxes due to your children upon inheritance
Distribute inheritance to your children with less gift tax during your lifetime

How is a Family LLC Structured?

A Family LLC is managed by the parents. The children or grandchildren hold shares in the LLC’s assets without management or voting rights. The parents can distribute, buy, sell, or trade the LLC’s assets but other members have restrictions regarding the sale of LLC shares, company withdrawal, or membership transfer. While gifting shares to younger members come under the gift tax, significant benefits permit you to gift more while lowering the tax value of your estate.

Upon establishing a family LLC following your state’s legal process, you can transfer assets into the LLC. The management will decide how best to translate the market value of these assets into LLC units of value in much the same manner as stock in a corporation. You are now ready to transfer ownership of LLC units to your children or grandchildren as you desire.

The value of units transferred to non-managing members becomes discounted because the LLC units become less marketable without management rights which is where tax benefits come into play. The manager of the LLC can often reduce the value of transferred units by as much as forty percent of their market value. In essence, non-managing members may receive an inheritance advance at a lower tax burden than otherwise due to their personal income taxes. Additionally, the overall value of your estate is reduced, lowering estate tax when you die.

What is Transferred to a Family LLC?

You can transfer almost any asset into a family LLC, but typically they include:

Property – Titles to land and structures built on that land are transferable; however, check with any mortgage holder before such a transfer if you need their approval.
Cash – It is permissible to transfer money from personal bank accounts into the LLC and distribute it among members.
Personal possessions – You may transfer ownership of stocks, precious metals, automobiles, boats, jewelry, artwork, or other significant collections or belongings into the family LLC.

Upon the death of an LLC owner, some states require the dissolution of the LLC if there is no specific succession plan. A transfer to another individual upon death as defined in the operating agreement creates a joint tenancy membership, avoiding the LLC’s dissolution. This transfer builds a revocable trust to hold the LLC membership or a probate process if the LLC goes through court to determine a succession plan.

Asset Protection with Your Family LLC

The key benefit of a business LLC is that the owner is not liable for the company’s debts. The Family LLC also provides the heirs’ protection from creditors in the event of a parent’s default, bankruptcy, or other family obligations. It is not permissible for creditors to go after these assets.

A family LLC can be a powerful tool to manage your assets and pass them to your heirs. You can maintain control over your estate as an LLC manager while providing significant tax benefits to you and your children. Creating a Family LLC for estate planning purposes is complex and requires legal expertise from an Estate Planning Attorney and a financial advisor before formalizing your LLC plan. We hope you found this article helpful. If you’d like to discuss your particular situation, please don’t hesitate to reach out. Please contact our Cincinnati office by calling us at 513-771-2444 with any questions.

Making an Estate Plan for Unmarried Couples

May 2, 2022Filed Under: Asset Protection, Estate Planning

Americans over 65 are experiencing divorce and widowhood at record rates, resulting in new partnerships. The US Census Bureau reports that more than half of all older adults have only married once, opting to stay legally single in their future relationships. Cohabitating can have unforeseen and unintended consequences without a legally recognized civil union, marriage, or domestic partnership certificate.

For instance, your assets are not mutually inheritable without careful estate planning that includes a “living together contract.” This contract type can be specific and, as an example, cover one transaction, such as purchasing a new home. The contract can also encompass every aspect of your property and finances, including asset distribution in the event of incapacitation, death, or breakup.

Many believe they can address domestic decision-making, such as permissions for owning pets, entertaining guests, and even including minor tasks like who will do the dishes in a casual contract, but it is unlikely to be enforced by the courts. If you’re an unmarried couple, it is safer to draw up a comprehensive agreement, enforceable by the courts, that will see you through your lives together. However, you won’t want to co-mingle personal and financial clauses in a single contract as it may render the agreement unenforceable, negating the importance of the contract’s financial clauses.

For estate planning purposes, a comprehensive living together agreement includes all assets and property owned before the relationship and another for any acquisitions during the relationship. The property and asset division is much like a prenuptial agreement. Remember, joint obligations to a mortgage company or a landlord do not create a contractual relationship or entitle you to a property settlement in the event of death or the parting of ways. With non-marital agreements, each partner should also have a valid will for the state in which they live.

A living together contract often includes rules regarding gifts received, living expenses, property purchases, inheritable rights, and a method for dispute resolution that may arise later, typically through mediation. Having a living together agreement in writing can avoid a host of future legal issues and can be developed in the spirit of two fair-minded individuals clarifying the understanding of a partnership.

Many older Americans prefer not to remarry as it can have consequences on social security income, pension benefit awards, alimony (as part of a divorce settlement), tax consequences, and rights of survivorship. A new spouse’s income may disqualify a child for college financial aid or, in the case of a disabled child, impact the eligibility for government assistance programs.

Because many seniors and near seniors live together in non-legally recognized ways, estate planning can create challenges when partners want to provide for the other after their death.

A legally binding living together contract must work in concert with existing plans for already named heirs. A qualified estate planning attorney can draw up this contract and make necessary changes to current estate plans to avoid future legal conflicts. Like all estate planning documents, the regular review of its content to account for major life changes or preferences is crucial. If you plan to make substantive changes, it is best to be open with your partner and any adult children.

Avoid the possibility of personal and family conflict through open communication channels and mutual understanding. A newer, unmarried partner of a beloved parent may provoke suspicion of intent by adult children. Cohabitating is becoming more popular; however, as states adjudicate separations and inheritance, there is much to consider about planning property and asset control. To protect and provide for your partner and your adult children, consult an estate planning attorney about a living together contract in conjunction with your estate plan to ensure your documents reflect your wishes and are legally enforceable. We hope you found this article helpful. If you’d like to discuss your particular situation, please contact our Cincinnati office by calling us at 513-771-2444 with any questions.

The Various Ways to Hold Title to Property

October 20, 2021Filed Under: Asset Protection

Most Americans consider real property, like their home, the most significant part of their overall net worth. How the home and other pieces of real property are titled deserves careful consideration. Real estate constitutes the land and any structure, including vegetation, livestock, crops, and other natural resources that sit on the land under the state’s law. Real estate can be commercial or residentially owned. Ultimately how you hold a property title has far-reaching consequences for liability, and when it comes time for sale or the bequeathing of it as an inheritable asset.

The title is a reference to the document that lists the legal owner(s) of a piece of property and can depict ownership of both personal and real property. Real estate titles are regarded as real property as it is a tangible asset. The title for real property, by law, must be transferred if the asset is sold or inherited and must be clear for the title transfer to take place. A clear title is free of liens or any other encumbrance posing a threat to proper ownership. The most common types of real estate titles are joint tenancy, tenancy in common, tenants by the entirety, sole ownership, and community property. Less common property ownership titles are corporate, partnership, and trust ownership.

Individual name or sole ownership allows for a single person to hold title, even if you are married. If the person becomes mentally or physically incapacitated due to injury or illness, a spouse or family member typically will need to conduct business with regard to your property. Your family member will not be able to do business transactions like refinancing or changing lines of credit, and they will be unable to act until a court appoints someone to act on your behalf. Many people assume if they have a will it will address the problem, yet a will does not go into effect until after you die and is not in effect if you become incapacitated.

Joint tenants (some may have rights of survivorship) occur when two or more people hold the title to real estate jointly. This type of title is widespread among but not exclusive to married couples. Unmarried couples may also hold joint tenant titles as can parents and their adult children. It is a fair, uncomplicated, and free way to hold the title. In the case of a couple, the death of one automatically transfers full ownership to the surviving owner without probate. However, probate is more than likely just to be postponed. In the event, the surviving owner dies without adding another owner, or if both owners die at the same time, probate is almost certain to occur before the property can go to the heirs.

Being a co-owner means that to sell, refinance, or take any action to the property, both owners must agree to the business action. If there is disagreement or in the event your co-owner becomes incapacitated, the court will become involved to resolve the disagreement or to protect the interest of the one who has become incapacitated. Court involvement will occur even in the event the incapacitated owner is your spouse. Joint tenants also expose the property to both of the co-owners obligations and debts. If a creditor successfully sues your co-owner, you could lose your home. In the case a co-owner is not a spouse, there can be income tax or gift tax problems. A will does not control any jointly owned assets, and you may mistakenly disinherit your family when your co-owner inherits your share, particularly in the case of second marriages with children from a previous union.

Tenants in common (TIC) allows for two or more people to hold title to real estate with equal rights during their lifetime to enjoy the property. A tenant in common title creates shares of ownership, and those shares will be distributed as directed in a will upon an owner’s death. In the absence of a will, the property goes to the heirs of the owner. As a tenant in common individuals holds the title for a respective part of the property, they are at liberty to dispose of said owned property or encumber it at will. Owners of their respective shares are permitted to use their portion of the property as collateral or in financial transactions. They may also be sued or have creditors place liens on only their portion of the property.

Tenants by entirety (TBE) are only permissible if the owners are legally married. This title, for purposes of ownership, treats the couple as one person for legal action and interpretation. Upon the death of one person, the TBE title is transferred in its entirety to the other spouse. This is advantageous as no legal action is necessary upon the death of one’s spouse. It does not require a will and probate is unnecessary.

Community property is only in effect in nine states (AZ, CA, ID, LA, NV, NM, TX, WA, and WI) and is a form of joint ownership between spouses commonly referred to as community property. When you die, your share of the community property is automatically transferred to your surviving spouse unless your will provides otherwise. Both tenants, by the entirety and community property titles, can find the remaining owner with several new co-owners, who, upon their death, can have their heirs inherit the property. Also, issues of incapacity and lawsuits are magnified if several property owners are trying to reach a consensus about the sale of the property or other business actions.

Corporate ownership allows a legal entity, a company owned by shareholders, to hold title to the property. Partnership Owners can own real estate as a partnership. This title constitutes two or more people who transact business for profit as co-owners. There are also limited partnerships where an investor has limited liability because they do not make management decisions regarding business transactions of the property. In the case of limited liability, a singular general partner will typically be responsible for making business decisions on behalf of the identified limited partners.

Trust ownership, most often in the format of a revocable living trust, is a legal entity that owns the real property, which is managed by a founding or designated trustee on behalf of all trust beneficiaries. In the event you become incapacitated, your named successor trustee can seamlessly take control of your trust without court interference. A successor trustee is legally obligated to follow the instructions put forth in your trust. If you recover from incapacitation, you resume control of your trust. If you were to die, the property would be distributed according to your trust instructions and without probate. Holding real estate in trust ownership has challenges regarding benefits that surround financial and legal liability, managerial influence, and tax considerations. A real estate trust document can provide significant advantages to property owners but only if created by competent legal staff who take into account the complexities surrounding the trust and its interaction with the liabilities listed.

Methods of holding and owning title to real estate property are determined by state law and, as such, must be considered when researching and determining the best method to acquire and hold title to real property where you live. Depending on the complexity of your situation, assessing the best way to title your real estate may require professional real estate, legal, and tax guidance. We help clients determine the best way to hold title to the property, and whether a trust would be beneficial. If you’d like to discuss your particular situation, please don’t hesitate to reach out. Please contact our Cincinnati office by calling us at 513-771-2444 with any questions.

What is an Irrevocable Life Insurance Trust

September 23, 2021Filed Under: Asset Protection

Since the federal estate tax exemption allowance appears to be in jeopardy of being lowered, it may be time to reconsider how you plan to pass generational wealth to your heirs. Senate Democrats are proposing to lower the current estate tax exemption from $11.7 million to $3.5 million for individuals and $23.4 million to $7 million for couples. Whether this particular Congressional bill will pass into law is unknown; however, change is likely coming to estate tax exemptions. Even without action by Congress, in 2026, the current rate will sunset and essentially be cut in half to about $6 million per individual.

Understanding Irrevocable Life Insurance Trusts and Other Taxations

To address additional inheritance taxation, many look to an irrevocable life insurance trust as a mechanism to reduce estate tax and pay your heirs part or all of the amount your estate will be taxed. The asset of the trust will be one or more life insurance policies. However, beware, as once an irrevocable life insurance trust (ILIT) is created, it cannot be rescinded, modified, or amended. There are several important requirements to create and maintain an ILIT properly, and each requirement helps to explain the nature of such a trust.

If you are the trust grantor, you cannot also serve as a trustee because a trustee controls the trust, leading to the trust being considered a part of your estate. It is crucial to name a trusted person or financial institution to act as a responsible trustee.
The trust itself must be the owner of the life insurance policy. If you transfer an existing policy to the trust and die within three years of the transfer, the policy is part of your estate due to a look-back rule. The trust can directly purchase a policy to avoid this risk.
The trust must pay the policy premiums, and you must transfer funds to the trust for such a purpose. This situation can create an issue with gift taxes as a transfer to a trust is not usually afforded the yearly gift tax exclusion of $15,000. To qualify as a gift for a tax exclusion, the recipient must have a “present interest” in the money. To accommodate this requirement, you can use what is known as “Crummey” power, giving beneficiaries the ability to withdraw funds transferred to the trust for up to thirty days. Sending a Crummey letter to the beneficiaries of an ILIT informs that a gift has been made to the trust, and there is an immediate and unrestricted right to withdraw those assets for up to thirty days. After thirty days, the trustee can pay the annual insurance premium with the funds. Although you run the risk that the beneficiaries will withdraw these funds, if you make it clear the financial benefit is greater in the future, it should not present a problem.
Generally, the beneficiary of the life insurance policy is the trust. After the funds are deposited into the trust, the trustee can distribute the assets to the beneficiaries as specified in the trust. If your beneficiaries are still minors, you can instruct the trustee to wait until they reach a certain age. Leaving the assets in the trust can also protect them from beneficiaries’ creditors.

ILIT’s can own both individual and second to die life insurance policies. All premium payments should come from a bank account owned by the ILIT. The downside to an ILIT is that it is irrevocable. However, your ILIT is a powerful tool that can minimize your estate taxes, avoid gift taxes, protect assets and government benefits, select the timeline of distribution to beneficiaries, and more. If you would like to discuss whether an ILIT may be right for you, give us a call. We would be happy to schedule a confidential meeting to discuss your needs. Contact us at 513-771-2444.