It is no secret that most companies in the United States are set up as limited liability companies for tax advantages and asset protection. Setting up a family-owned company as LLC is also a vital estate planning tool that helps distribute assets to family members.
Standard LLC versus family LLC in estate planning
A standard LLC and a family LLC operate in the same manner with one critical difference. A family LLC is formed by individuals related by blood or marriage, but unrelated individuals with a common business goal can form a standard LLC.
How a family LLC works
In a family LLC, parents are typically the founders and management, while the children and other loved ones have shares in the LLC property without voting and management rights. This condition means that only the parents own the right to buy, sell, trade, or share the LLC’s assets.
The children listed in a family LLC have limited rights, and they cannot transfer their shares, membership, or pull out from the corporation. The parents make the major financial decisions in LLC, which helps them protect their assets.
Key takeaways of using a family LLC in estate planning
Below are the main reasons and advantages of using a family LLC in estate planning:
- Manages asset distribution: Parents or the founders of a family LLC can share assets in the company during their lifetime.
- Helps mitigate gift taxes: Although there are no gift taxes in New York, the value of gifts made within three years before death can be imposed as a “de facto” gift tax. A family LLC offers a way to avoid these types of gift taxes as they are not included during the distribution of an asset.
- Holds the assets within the family: A family LLC restricts the members from distributing shares outside the family.