Limited Liability Companies (LLCs) [video]

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Hello, I'm Stephanie Burnham. I'm an estate planning and probate attorney licensed in New Hampshire and Massachusetts. Today I wanted to talk a little bit about limited liability companies and how they can be built into an estate plan and give you some very valuable tools and techniques for transferring assets from you to the next generation. Now, a limited liability company is actually a company.

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You register with the state in which you're doing business, and you set up what's called an operating agreement. And operating agreement says how you're going to run that limited liability company. The operating agreement can talk about whether or not you have managers or members running that limited liability company. It talks about how people can become members, whether you can just vote them in, or whether they have to meet certain criteria in order to become a member.

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It talks about how people are kicked out and what happens when somebody goes through death, or they go through a bankruptcy or some other issue that you don't want to affect the business itself. This operating agreement is a really cool tool to be able to provide transfer of assets using some really interesting tax benefits, as well as controlling who has the ability to actually receive these shares.

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Now, a limited liability company is something that's really an empty vessel until you put things in it. So when you form a limited liability company to run something, say you want to run a farm, you may need to put or deed the real estate into the name of the limited liability company so that it is recognized that that limited liability company is in charge and controls that.

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Real estate works the same. If you have a company car or a business account checking account. all of these things, even equipment, equipment. You may have tractors, different types of equipment like photography equipment or computer equipment. All of these things should be owned by your limited liability company and purchased by credit cards or other things, and listed as assets on your limited liability companies.

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paperwork. When it comes to the business assets and the equity and things that you're building in this company. Now, this is where it gets interesting because you set up this operating agreement. You have the ability to transfer your shares. Now, the company, the LLC, owns the real estate or owns the vehicles and the equipment, and you're not actually transferring the land or the equipment or the vehicles.

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You're transferring shares and the limited liability company to someone else. Now this is where it becomes interesting transferring these shares. If you limit who actually has the authority to receive the shares, these shares can actually be valued less than what they would be if they were not limited. For example, suppose you have a large piece of farmland and it's worth $1 million, and your piece of farmland you put in your limited liability company.

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But it's a family limited liability company, and the only people that are entitled to inherit or to receive those membership shares must be actual relatives. They have to be related to you in blood of some sort or legally adopted. So they have to be a legal relative of yours in order for them to own a membership share. Otherwise they can't do it.

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Well, that's not going to be valuable to a third party. That's not going to be valuable to your neighbor because your neighbor can't actually receive a membership share. And so as a result of it not being valuable, and because it's limited and only certain people have the ability to own it, maybe when it's time to transfer that limited liability company, it's not really quite worth $1 million because you can't sell it unless all of the people agree, all of the members, and you can create that as well.

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It doesn't have to be a majority of 51. You could make it a super majority of 75% have. The people have to agree to sell. You also have the ability of limiting who has the authority to do what. So, for example, mom and dad can be the managers of the limited liability company and have all of the control and they can transfer their membership shares, the shares of the farm to their children, but their children don't have the ability to make any decisions.

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Well, if the children don't have the ability to make any decisions and all they have is an interest in the farm, until Mom and dad pass away their shares are not worth as much as they would be if Mom and Dad were just giving them the actual farm directly. And so you're able to actually reduce the value of what those shares are worth when you give them to the kids.

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And that can be really important, because if you're ever thinking about gift taxes and how you go about giving stuff to your family, well, there are limitations on what you have the ability to give per year. This year, that's $17,000 per person. And so as a result, when you go to give a membership share or you want to give some of the real estate, the fact that it's limited to who can own it and what they have the authority to do can actually reduce the value of that share.

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So you could transfer that million dollar property in that LLC to your kids. And for tax purposes, it could be as little as $600,000 or up to 40% discount. And being able to transfer that. So you have the ability of keeping families, you know, limited as to what they can do, keeping property in the family for generations to come.

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Putting limitations on where things can go and keeping that family farm in the family for generations. Now with that comes some additional benefits. A limited liability company has asset protection in both directions, meaning that if you do something like agritourism and you have people that come on to the land, you can make sure that even though you own interests in the limited liability company, if they trip and fall on the land and they get hurt, they can't go after your personal house because it was the limited liability company that owned the land they were harmed in, not you personally.

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That also works in the opposite direction. If a member, somebody who owns shares, gets in a car accident or goes through a divorce, or is dealing with a issue that involves their own assets, the shares are not valuable to anyone other than the family member because we've limited them. And these are the actual assets that are owned by the limited liability company are exactly that owned by the limited liability company and not the individual.

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So they're not subject to the idea of having a lane or being forced to sell. So you can see that there's some asset protection and some really valuable tax benefits to creating a limited liability company as part of your estate plan. If you have a business or real estate, family vacation homes, farm land, all these different entities, not just the idea of putting together a typical business entity.

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I hope you found this information useful. It should not substitute for good legal advice. Please make sure you speak to your own attorney about your particular circumstances. in order to ensure you get the best legal advice possible. Thank you very much. Have a great day.