Limited Liability Companies and Estate Planning
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Written by Morgan T. McDonald
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Tuesday, 27 December 2011 |
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estate planning
With the widespread adoption of limited liability company acts by state legislatures, limited liability companies (LLC) have become the business organization of choice for small closely held businesses. An LLC also provides tax advantages to transfer wealth from one generation to another while allowing the donor to maintain control over over the assets until death.
An LLC consists of members and managers. It can be structured like a limited partnership, with the members being passive investors and the managers actively managing the company. The concepts of wealth transfer are the same for LLCs and limited partnerships: The generation transferring the wealth (the parents) forms an LLC, making themselves both managers and members. The generation receiving the wealth (the children) are made members of the company. Initially, the parents hold all of the membership interest in the company along with the assets it represents. Over time, the membership interest is gifted to the children, within allowable gift tax amounts, and the parents retain the control of the company and its assets as the managers. LLCs can be structured to allow flexibility to accommodate income distribution issues and restrictions on transfers of interests.
IRC section 2036. The driving force behind the estate planning methods described above is IRC section 2036.
IRC section 2036 states that whenever property is transferred (except in an arm's-length transaction for fair market value) and the transferee retains the right to enjoyment (use) or the income, the value of the property transferred is included in the estate of the transferee. Furthermore, if the transferee retains the right to control who will use the property or who will receive income produced by the property, the property will be included in the transferee's estate.
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Last Updated ( Tuesday, 27 December 2011 )
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Basic Estate Planning
