How do I determine if I need a LLC and a trust for my real property?
1. Question: How do I determine if I need a LLC and a trust for my real property?
Answer: Once we meet and determine how you own your real property and your plans for the property, and what your estate plan is, we can determine how they can work together to protect and distribute your assets. The legislature in Wyoming has been proactive in providing protection for real property held in a Limited Liability Company. Wyoming statutes provide:
- judgment creditor cannot routinely "pierce the veil" of the LLC to obtain assets of the LLC
- a creditor cannot force transfer of a membership interest
- a creditor cannot foreclosure on the membership interest of a debtor member
- a creditor cannot force dissolution of the LLC
- a creditor cannot interfere with the management of the LLC
- the membership interest of the LLC is owned by your trust, which provides a second protection
2. When and Why I use the LLC with a Trust for Estate Planning.
The attraction of using a limited liability company is the liability protection as listed above. Business owners want to protect their business interests while maintaining control. An LLC can achieve this goal. Likewise, an LLC is valuable for estate planning in protecting business interests for passing wealth to the next generations. For example, there can be protection against creditors who may wish to garnish your ownership in your company because the LLC membership interest is owned by the trust. Another estate planning use is the ease of transfer, especially of real estate because the real estate is titled as owned by the LLC and the benefit of the transfer can be the trust. Other uses are retained control, and the creating of nonvoting, nonmanaging interests. Control is critical for business owners and an LLC can provide the structure needed to accomplish that goal while protecting ownership and benefitting your trust.
Multiple Entities. Many times, business owners should consider whether multiple entities make sense to limit liability. A strategy could be: (1) an entity to serve as the operating business, holding few assets on the balance sheet; (2) an entity to hold valuable assets such as patents, trade secrets, software, websites and other intellectual property, which serves as the holding company (3) An entity to hold the real estate for the operations.
Single Member LLC. A single member LLC can be a good choice for transfer tax purposes and state law creditor protection, but is mostly ignored for all federal income tax purposes. See Treas. Reg 301.7701-1(a) and 301.7701-2(c)(2). When valuing an owner's rights and interests, state law informs value.
Funding the LLC. One issue regarding operating issues for an LLC is making sure the ownership interests are correct and represent what is desired. The funding of the LLC occurs with contributions of cash, property or services. Profits, losses and tax consequences can be set forth in the operating agreement and they can be disproportionate to the members' ownership.
Voting Rights. An LLC can distribute voting rights in proportion to ownership interests. Or, the vote of a member with a 10 percent interest can count twice as much as the vote of a member with a 5 percent interest. If the operating agreement is silent or doesn't exist, state fallback provisions apply.
The Asset Protection Trust and the LLC. A domestic asset protection trust (DAPT) is generally an irrevocable trust with an independent trustee who has discretion to make distribution to a class of beneficiaries which includes the settlor. Wyoming is one of the states that has passed asset protection statutes. The transfer to the trust is a complete gift, and the assets are excluded from the settlor or beneficiary's estate.
Other Trusts. Another type of trust used in estate planning in called a QTIP trust. The primary reason for using this type of trust is to limit the surviving spouse's access to trust principal while preserving marital deduction for estate tax purposes. For example, this type of trust is used frequently when there are second marriages. The trust principal can be preserved for the first marriage children.
Principal Changes. A member of a LLC can transfer an interest to another person as a bequest after death. There are limitations on what can be transferred. A member can only transfer his financial interests in the business or or the ability to claim distributions. The managerial rights of the original member cannot be transferred to a successor without the approval of the other members. For example, when the person dies, the person's beneficiary can only gain financial rights to the business.
Operating Agreement. Automatic transfer of full rights to a beneficiary after a member's death is one thing that the operating agreement can permit.
The Use of LLCs in Estate Planning under the Tax Cut and Jobs Act Passed in 2017. On death, the assets receive a step up basis. The step will generally reduce gains on the sale of assets after death. This provision can be built into the Operating Agreement. Beneficiaries, if taking the assets outright, inherit the stepped up cost. Because the estate tax exemption is so high, we can now consider using a joint spousal trust. How does this impact an LLC? For one, the trust can be a member of a limited liability company holding the estate assets. It should be noted that there is a separate appointment of a trustee for the trust, which is distinct from the LLC managing estate assets. Next, with the ownership of the LLC membership interests remaining legally in the Trust, the trustee will receive the LLC distributions and will allocate the appropriate share to the beneficiaries. The management of the family business will be by the LLC manager. If they become disabled or die, this planning structure allows the trust to provide an efficient means of transferring wealth intergenerationally. Most importantly, the LLC serves as the legal shield to protect assets from creditors, divorce or other wealth predators. And the trust works hand in hand with the LLC to transfer your assets.