limited liability companies chapter 44 tools & techniques of estate planning copyright 2011, the...
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Limited Liability Companies Chapter 44Tools & Techniques of
Estate Planning
Copyright 2011, The National Underwriter Company 1
• Combines limited liability like a corporation with the pass through income tax rules of a partnership for its members– Avoids double tax on income– Losses incurred by the entity will be passed through and
deductible by the members
What Is A Limited Liability Company (LLC)?
Limited Liability Companies Chapter 44Tools & Techniques of
Estate Planning
Copyright 2011, The National Underwriter Company 2
• No limits on classes of memberships in an LLC
• Upon death of a member, the LLC may elect to adjust the basis of the assets to FMV to the extent of the decedent’s interest
What Is A Limited Liability Company (LLC)?
Limited Liability Companies Chapter 44Tools & Techniques of
Estate Planning
Copyright 2011, The National Underwriter Company 3
• An LLC, like an FLP, can be used to manage a family business, real estate, or other investment assets without naming a GP to assume personal liability for the debts of the entity
• In most jurisdictions the LLC and its counterpart the LLP (limited liability partnership) are used as a form of organization for a professional practice
What Is A Limited Liability Company (LLC)? (cont’d)
Limited Liability Companies Chapter 44Tools & Techniques of
Estate Planning
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• Check state statute for specifics• General requirements for an LLC to be treated as a
partnership for income tax purposes:– Articles of organization setting forth the purpose for which
the entity is formed
– Participants are called members• Other entities such as corporations, partnerships, trusts and
estates can be members
– Provisions for capital contributions
What Are The Requirements?
Limited Liability Companies Chapter 44Tools & Techniques of
Estate Planning
Copyright 2011, The National Underwriter Company 5
• General requirements (cont’d):
– An operating agreement governs management of the entity
• Specifies if the LLC will have officers/managers
• Specifies whether management will lie with the officers or with all members
• Specifies allocation of profits and losses
• Provisions can alter many of the legal requirements under the governing state statute
What Are The Requirements?
Limited Liability Companies Chapter 44Tools & Techniques of
Estate Planning
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• General requirements (cont’d):
– Voting is generally in proportion to capital contributions
– Assignment of interests in LLC generally follow pattern of an LP
– Dissolution of the entity will occur upon expiration of a fixed term or unanimous consent of the members, and has considerable tax consequences
What Are The Requirements?
Limited Liability Companies Chapter 44Tools & Techniques of
Estate Planning
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Example:
– 10 unrelated investors are interested in joining together to acquire and develop mining property in a western state
• Very risky venture
• Will produce large profits if successful
• Large losses if unsuccessful
• Liability for debts, potential damage to adjacent properties, and injuries to workers
• Limited insurance to cover liability risks
How Is It Done?
Limited Liability Companies Chapter 44Tools & Techniques of
Estate Planning
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• An LLC would allow:
– Direct passthrough of profits or losses
– Different classes of ownership and participation
– Limited liability
– Either active participation by all members or delegation of management
How Is It Done?
Limited Liability Companies Chapter 44Tools & Techniques of
Estate Planning
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• Key is to make sure the entity qualifies for partnership income tax treatment
• One way is to make sure the entity only contains two of the four corporate characteristics:
– Limited liability
– Centralized management
– Free transferability of interests
– Continuity of life
Tax Implications
Limited Liability Companies Chapter 44Tools & Techniques of
Estate Planning
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• Second way is to follow the “Check–the-Box” regulations and ask three questions:– Is there an entity separate and apart from its owners? If so,
– Is that entity a trust – or is it a business entity? If it is a business entity, then
– Is the entity – “per se” – a corporation? If “no” then it can elect its classification for federal tax purposes, merely by checking a box
• Federal tax law, not state law, determines whether or not an organization will be recognized as an entity separate from its owners
Tax Implications
Limited Liability Companies Chapter 44Tools & Techniques of
Estate Planning
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• “Per se” corporations include– Business entities incorporated under federal or state
statutes where the statute describes or refers to the entity as incorporated or as a corporation,
– Associations,– Joint stock companies– Insurance companies– State chartered banks insured by the FDIC– Business entities owned by a state or one of its political
subdivisions– Business entities taxed as corporations under certain IRC
provisions, or– Certain foreign entities
Tax Implications
Limited Liability Companies Chapter 44Tools & Techniques of
Estate Planning
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• Merely checking a box may not eliminate all problems, caution is advised
• An entity will be considered a business entity if it is not a trust or is subject to a special tax regime
Tax Implications
Limited Liability Companies Chapter 44Tools & Techniques of
Estate Planning
Copyright 2011, The National Underwriter Company 13
• An entity will be considered a business entity if it is not a trust or is subject to a special tax regime
• Once considered a business entity, it will be treated as a– Corporation Always taxed as a corporation
(Under state law or publicly traded entity)– Partnership Taxed as partnership, unless
(2 or more affirmative election to be taxedmembers) as corporation
– LP, LLC, LLP– Single member, Taxes as sole proprietorship,
unincorporated unless affirmatively elects to beassociation taxed as corporation
Tax Implications
Limited Liability Companies Chapter 44Tools & Techniques of
Estate Planning
Copyright 2011, The National Underwriter Company 14
• Even though only one spouse is listed as a member of an LLC,
– If the assets contributed to the LLC were characterized as marital or community property,
– The membership itself will be characterized as community property
• Check state law, but a classification of a membership as marital may also give a member’s spouse rights to participate in voting or management
Issues In Community Property States
Limited Liability Companies Chapter 44Tools & Techniques of
Estate Planning
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• In the event of a death of either a member or non-member spouse, or a divorce
– Rights in the membership may be divided to reflect the rights of the spouses under community property laws
– Depending on the state, a nonmember spouse may be treated as an assignee and not have the full rights of a member
Issues In Community Property States