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The Family Limited Liability
Company:
An Excellent Tool For
Asset Protection & Tax Savings
Celia
Clark, J.D., LL.M.
David B. Mandell, J.D., M.B.A.,
Because it
provides both the limited liability of the corporation and the favorable
income taxation of the partnership, the limited liability company (LLC) is
a superior legal planning tool. This article will explain the basic
characteristics of the LLC, including its asset protection and tax
benefits. We use the term FLLC to denote "family" LLC.
Key FLLC Characteristics
Taxed as a Partnership
The LLC is taxed as a partnership. Income
and losses "pass-through" the LLC to the individual members. The
LLC does not pay income tax -- its members do. LLCs can choose to be taxed
as a corporation through an election.
Limited Liability of Managers
and Members
Members, managers, agents, and employees of
an LLC are not liable for the debts, contracts, or acts of the LLC, and
have much of the same liability protection afforded to a corporation with
respect to its officers, directors, and stockholders. It is essentially
the same liability protection given the limited partner of a limited
partnership. A manager's or member's personal wealth is isolated
"outside" the range of general LLC debts and liabilities.
Managers and members can only lose what they invest in the LLC. However,
as with a corporation, this protection will not shield LLC members or
managers from personal liability arising from unlawful acts committed
personally or contracts signed personally. LLC Assets are Protected from a
Member's Creditors LLCs also offer another kind of shelter we call
"inside" protection. If a member's creditor comes after the LLC
property, the creditor cannot force a sale of the member's interest or any
of the LLC assets. Nor can the creditor vote on behalf of the
debtor/member. The member's creditor can only apply to the court for a
charging order, which instructs the LLC to pay to the creditor
distributions that would normally go to the debtor/member.
How the FLLC Protects You From
Business Creditors
Operating any business involves lawsuit
risks. The business may fail to pay its debts, its employees may have car
accidents, customers may be injured in the business, disgruntled
ex-employees may sue for discrimination or sexual harassment. Protecting
your personal wealth from these and other business risks is essential
today. The FLLC accomplishes the goal of protecting your personal assets
from business risks. Outside protection of the FLLC is as strong as the
corporation's - if the LLC formalities are followed, only company assets
are exposed to company creditors and plaintiffs. The personal wealth of
FLLC members is untouchable. When considering a corporation, it makes
sense to examine the FLLC first. You will get the limited liability of the
corporation without a second layer of tax on business profits.
Gifting FLLC Membership
Interestes
How do you maintain control of assets and
reduce your taxable estate with an FLLC? By transferring assets to an FLLC,
making yourself the FLLC manager, and gradually gifting FLLC interests to
your intended beneficiaries. As the FLLC manager, you control the FLLC
assets, yet gradually move FLLC interests out of your estate, using
tax-free gifts of $10,000 per donatee per year. The FLLC interests may
also have discounted values becau- se of lack of marketability and lack of
control. This means you can gift more than a mathematical $10,000 value of
FLLC interest per year to each recipient. Let's see how that works.
Case
Study: Robert's Mutual Funds
Robert Jones is a 65-year-old retired
executive with almost $1 million in mutual funds. Assume that Robert sets
up an FLLC to own the mutual funds. He makes himself the sole manager. He
initially owns 92.5% of the membership interests, gifting 1.5% each to
his five grandchildren. While this 1.5% was, on "paper," worth
approximately $15,000, his minority interests were discounted by 33% or
more because of two valuation discounts permitted by the IRS: lack of
marketability, and lack of control. This brings the value of his
transferred interests within the $10,000 tax-free gift limit. Robert can
continue to gift each grandchild $15,000 worth of FLLC interests each
year, completely tax-free, as long as these discounts are applied. If
Robert lives to 75, he will have gifted a total of $750,000 worth of
mutual fund FLLC interests to his grandchildren ($150,000 each), tax-free.
This $750,000 is no longer in his estate, and so is not subject to estate
tax. Because Robert's other assets put him in the 55% estate tax bracket,
the tax savings from the FLLC will be $412,500 (55% x $750,000), allowing
him to give that much more to his grandchildren. And, as the FLLC's sole
manager, Robert controls the mutual funds while alive, permitting him to
distribute income as he deems appropriate, and sell and reinvest assets as
he chooses. The above example is just one of the many ways to use LLCs
either in the business or family context. It is an important tool that
should be considered as part of any business, asset protection, or estate
plan. |
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