How to Use an LLC for Estate Planning

Ever worry about leaving your family business or property to your kids and triggering high taxes or disagreements? An LLC (limited liability company) can be your answer to protecting your family’s home, land, cars, and more. An LLC offers a dynamic and flexible way to structure your family’s assets and business to get the best tax cuts for passing on your estate to family members.

What is an LLC?

The history of LLCs is a wild ride of philosophy and idealism, but to understand why LLCs are great for estate planning, you just need to know a few things about LLCs, or limited liability companies:

• An LLC is a business entity type meant to limit personal liability for its owners.
• LLCs create a legal distinction between your personal assets and the assets held by the company.
• You can grant LLCs ownership of property and other assets to centralize control and shield them from lawsuits targeting owners.
• LLC owners stay in control of how and when assets change hands, making the process more predictable and private.

In plain language: an LLC offers legal protection with tax benefits.

Types of LLCs

While many limited liability companies share similar characteristics and tax or asset protection benefits, there are a few ways an LLC can look:

• Single-Member LLC: A single individual or entity controls the LLC.
• Multi-Member LLC: Two or more owners control the LLC. This is popular for family businesses.
• Member-Managed LLC: All owners help run the business and have the authority to sign contracts and access funds on behalf of the LLC.
• Manager-Managed LLC: Owners hire one or more managers to run the LLC, but they may not own any portion of it.
• Professional LLC (PLLC): A normal LLC with licensing rules for licensed professionals (doctors, lawyers, accountants).
• Series LLC: One LLC acts as a parent LLC over a bunch of other children LLCs called series. Each series can have its own assets and members.

It’s easy to get caught up in the details, but you probably won’t need to be familiar with each of these LLC types. For family estate planning, a family LLC is just a multi-member LLC where all members are related through blood or marriage.

Families that plan together, stay together. And we’d know! Northwest Registered Agent is a family-owned small business advocate that can help you set up your family’s LLC, whether it’s the first, second, or third business you’re forming together.

Structuring an LLC for estate planning

Starting an LLC for your family is one of the smartest ways you can look after the future of your family and all it owns. To use an LLC in your estate plan, you typically create what is called a family LLC. To form a family LLC you follow the same steps to forming a regular LLC:

1. Choose a name for your LLC
2. Appoint a registered agent
3. File Articles of Organization
4. Apply for an EIN
5. Draft an operating agreement

The main difference with a family LLC is that all of the LLC members are, for better or worse, your family.

Family LLCs

To structure an LLC as a family LLC, the parents or elders (i.e. you) usually keep the management control, while the children or grandchildren are members/owners with economic stakes. In practice, that means you as the parent(s) run the business: you decide when to buy, sell, invest, or distribute LLC assets. The kids own a portion of the LLC but often have no voting or day-to-day control. Parents run it, and the kids get a slice on paper only.

This allows you to begin building a smart way for your property to transfer without relinquishing control of the items and worrying about unwise decisions being made by your heirs. You can take this a step further in your LLC operating agreement, where you can set rules for what happens if someone who’s set to inherit LLC assets passes away or divorces from the family.

Again, a family LLC is formed and structured the exact same way a multi-member LLC is formed, but often times the business is holding assets like cars, houses, land, cash, and other valuable items.

Asset protection

One of the most compelling reasons to form a family LLC is the asset protection the LLC offers items housed inside it. Most of the time, should any of the LLC members be the target of a lawsuit, creditors are not entitled to their share of the LLC. They can’t force any member to sell their share of the LLC, they can only claim profits, or the LLC payouts, or distributions, that may or may not take place.

In terms of estate planning, the protection an LLC offers is even more important. When you pass down assets to your family through an LLC, the LLC protects those assets from creditors or bad personal debt. For example, in the case of a family member’s death, the items they placed inside of the family LLC to pass on to other members can not be seized to pay off loans or debts.

LLC tax benefits

By default, an LLC is taxed as a pass-through entity. That means the business doesn’t pay income tax at the company level. Instead, each member reports their share of profit or loss on their personal tax return. For estate planning, LLCs offer a bit more benefits:

• Valuation discounts: Valuation is figuring out how much something is worth, like your share of a family LLC. Valuation discounts are ways to treat that share as worth a bit less to lower the taxable amount being given or gifted by up to 30–40%.
• Gift tax exemptions: The IRS collects gift taxes when you give someone something valuable, like money or property. Each year, you can give up to $19,000 per recipient (or $38,000 from a married couple) to someone without paying any tax on it. So you could give each of your children or grandchildren up to $19,000 ($38,000 if you’re married) without paying gift tax on those funds. It’s called the annual gift tax exclusion.

Note: To be sure of the exact discounts and exemptions applied to your family LLC, consult with a tax professional.

LLCs vs trusts

LLCs and trusts are both useful in estate planning, but LLCs and trusts do different jobs. A trust is essentially a legal box you put assets into for your beneficiaries. When you die, assets in a trust typically avoid probate (the court process of probate) and can reduce estate taxes.

Probate is the legal process of validating a deceased person’s will and distributing their assets appropriately. A court-appointed administrator typically oversees this process. Probate involves court appearances and public records and can delay your heirs receiving their inheritance for months or years if you don’t have a clear plan in place.

However, setting up a trust does not shield assets from lawsuits because it does not give liability protection. An LLC, on the other hand, does protect you from personal liability and offers tax flexibility. On its own, it doesn’t avoid probate, though. This is why establishing a thorough and detailed LLC operating agreement is crucial. Even simply including a Transfer-on-Death (TOD) provision in your operating agreement can save you.

Protecting your family’s assets

An LLC is one of the most flexible tools available for estate planning. With a clear operating agreement, you can help your family avoid unnecessary risks, ensure a smooth transfer of assets, and minimize the likelihood of future unpleasant surprises. It’s a smart way to protect what you’ve built and those you’re building it for.

*This is informational commentary, not advice. This information is intended strictly for informational purposes and does not constitute legal advice or a substitute for legal counsel. This information is not intended to create, nor does your receipt, viewing, or use of it constitute, an attorney-client relationship. More information is available in our Terms of Service.