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THE FAMILY LLC – A UNIQUE ESTATE PLANNING TOOL

Posted on 4/26/2017 by in Entity Formation Estate Planning Business Law Family LLC LLC
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A Family Limited Liability Company (FLLC) is a legal entity that serves as an estate planning tool. The main goals are to protect assets from creditors, provide management experience for younger generations, ensure who acquires a direct interest in the family business, prevent fragmentation of the family business and assets, and reduce estate and gift taxes.

 

A Family Limited Liability Company (FLLC) is a legal entity that serves as an estate planning tool. The main goals are to: (a) protect assets from creditors, (b) provide management experience for younger generations, (c) ensure who acquires a direct interest in the family business, (d) prevent fragmentation of the family business and assets, (e) and reduce estate and gift taxes.

 

FLLCs are great tools to transfer family businesses to younger generations. Parents, as FLLC owners, can employ children in the business and transition them into ownership and management roles to teach them responsibility. A Revocable Trust, integrated with a FLLC, allows parents to transfer the business to children that are interested in running the business. Parents can then, through a Revocable Living Trust, distribute other assets to other children to offset the inheritance of the business and provide for an equal distribution among children.

 

FLLCs also provide inside and outside creditor protection. A FLLC will protect the family business from creditors of individual family members. These creditors may only obtain a “charging order” against the FLLC ownership interest. However, the creditor cannot make management or business decisions (this remains with the family member). Similarly, if a creditor of the FLLC sues the FLLC, the individual family members are not personally liable.

 

FLLCs can also minimize or eliminate estate taxes. Currently (2017), a married couple can enjoy a maximum estate tax exemption amount of $10.9 million ($5.9 million for individuals) – no inheritance/estate taxes will apply if the gross value of the estate is below that amount. If an estate value is close to that amount, parents can gift ownership in a FLLC to children. The gifts reduce the taxable estate to under the exemption amount without triggering gift taxes.

 

Parents can also restrict children from selling the children’s interest in the FLLC to a third party. Parents can require children who are FLLC owners to sign a Buy-Sell Agreement. If the child attempts to sell their interest in the business (or the child divorces, dies, or becomes disabled), the Buy-Sell Agreement allows the FLLC to purchase the child’s interest. If the FLLC declines to purchase the interest, the other FLLC members may purchase the interest. This prevents individuals outside of the immediate family from becoming owners in the FLLC.

 

Lastly, a FLLC prevents fragmentation of inherited assets. If parents transfer rental properties or investments to children, each child will receive a fractional interest. These interests will become more fragmented as future generations inherit. However, if all rental properties or investments are held in a FLLC, only ownership of the FLLC changes (and title to the assets does not change, preventing ownership fragmentation). If you have any questions or concerns regarding these matters, please do not hesitate to contact the Law Offices of Tyler Q. Dahl.

 

Disclaimer: This material was prepared for general informational purposes only, and is not intended to create an attorney-client relationship and does not constitute legal advice.  This material should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction.