Category: Limited Liability Company (LLC)

keep the vacation home in the family

Keep the Vacation Home in the Family

There are several ways to keep the vacation home in the family and is not overly burdensome to any one member or couple in the family, according to the article “Estate planning for vacation property” from Pauls Valley Daily Democrat.

To begin, families have the option of creating a legal entity to own the asset. This can be a Family LLC, a partnership or a trust. The best choice depends upon each family’s unique situation. For an LLC, there needs to be an operating agreement, which details management and administration, conflict resolution, property maintenance and financial matters. The agreement needs to include:

Named management—ideally, two or three people who are directly responsible for managing the LLC. This typically includes the parents or grandparents who set up the LLC or Trust. However, it should also include representatives from different branches in the family.

Property and ownership rules must be clarified and documented. The property’s use and rules for transferring property are a key part of the agreement. Does a buy-sell agreement work to give owners the right to opt out of owning the property? What would that look like: how can the family member sell, who can she sell to and how is the value established? Should there be a first-right-of refusal put into place? In these situations, a transfer to anyone who is not a blood descendent may require a vote with a unanimous tally.

There are families where transferring ownership is only permitted to lineal descendants and not to the families of spouses who marry into the family.

Finances need to be spelled out as well. A special endowment can be included as part of the LLC or as a separate trust, so that money or investments are set aside to pay taxes, upkeep, insurance and future capital requirements. Anyone who has ever owned a house knows there are always capital requirements, from replacing an ancient heating system to fixing a roof after decades of a heavy snow load.

If the endowment is not enough to cover costs, create an agreement for annual contribut6ions by family members. Each family will need to determine who should contribute what. Some set this by earnings, others by how much the property is used. What happens if someone fails to pay their share?

Managing use of the property when there is a legal entity in place is more than a casual “Who calls Mom and Dad first.” The parents who establish the LLC or Trust may reserve lifetime use for themselves. The managers should establish rules for scheduling.

For parents or grandparents who create an LLC or Trust, be sure it works with your estate plan. If they intend to keep the vacation home in the family and wish to leave a bequest for its maintenance, for instance, the estate planning attorney will be able to incorporate that into the LLC or Trust.

If you would like to learn more about protecting property in estate planning, please visit our previous posts. 

Reference: Pauls Valley Democrat (July 29, 2021) “Estate planning for vacation property”

New Installment of The Estate of The Union Podcast

 

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Estate planning is a lot more than simply a tax strategy

Estate Planning is more than a Tax Strategy

Estate planning is more than a tax strategy. It’s about creating a legacy and protecting your family for the short and long term, explains the article Create A Holistic Estate Plan Now For Bigger Payoffs In The Future” from Forbes. The process begins with as much disclosure as possible. That means talking with your estate planning attorney about the challenges your family faces, as well as the assets to be left for loved ones.

One change to the tax code can disrupt decades of careful planning and leave people scrambling to protect loved ones. Market tumult can require assets to be sold to meet cash flow needs. Charitable contributions may also need to be reviewed and possibly changed, if the family’s asset level changes.

There are three aspects to consider when creating an estate plan: a lifetime spending strategy, a charitable legacy and bequests. All of these are impacted by taxes and need to be reviewed as a whole.

Lifetime spending strategy. These questions are centered on your goals and plans. Where do you want to live during retirement and how do you wish to live, travel and entertain? Will you stay in place and focus on charitable organizations, or travel throughout the year? It’s good to set a budget and stress-test it to see what different outcomes may arise.

A family that owns businesses or large real estate holdings may benefit from strategies, like family limited partnerships. A sale of the business to an outsider or a family member could create many different options, and all should be considered.

Charitable gift planning. Estate planning offers a way to clarify charitable giving goals and create a road map for how gifting can be transformed into a legacy. A well-planned charitable gift strategy can also minimize estate taxes and maximize the future of the gift, for both the family and the charities you favor.

A Charitable Remainder Trust is used to provide an income stream during your lifetime and reach gifting goals at the same time. One way to accomplish this is to transfer an asset, like highly appreciated stocks or bonds, into an irrevocable trust, thereby removing the asset from your taxable estate. The trustee may then sell the asset at market value and reinvest, creating a lifelong income stream for you or a beneficiary.

Leaving assets, not estate tax bills, for heirs. Families who own multiple properties in their own names or in a single LLC can lead to a lot of administrative headaches when the owners die. One simple fix is to place each property into a separate LLC, which increases the availability of strategic tax savings.

Another way to minimize estate taxes is through the use of life insurance. This is a strategy to do while you are still relatively healthy, as it becomes increasing difficult to obtain once you turn 60 or 70.

Estate planning is a lot more than simply a tax strategy. All of these planning tools take knowledge and time to set up, so creating an estate plan and working through the many different strategies is best done with an experienced estate planning attorney and before any trigger events occur.

If you would like to learn more about strategies to ensure your wealth goes where you want it, please visit our previous posts.

Reference: Forbes (April 6, 2021) Create A Holistic Estate Plan Now For Bigger Payoffs In The Future”

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when mom refuses to get an Estate Plan

Asset Protection In Estate Planning

You can make asset protection part of your estate planning.  Forbes’ recent article entitled “Three Estate Planning Techniques That Protect Your Assets From Creditors” explains that the key to knowing if your assets might be susceptible to attachment in litigation is the fraudulent conveyance laws. These laws make a transfer void, if there’s explicit or constructive fraud during the transfer. Explicit fraud is when you know that it is likely an existing creditor will try to attach your assets. Constructive fraud is when you transfer an asset, without receiving reasonably equivalent consideration. Since these laws void the transfer, a future creditor can attach your assets.

Getting reasonably equivalent consideration for a transfer of assets will eliminate the transfer being treated as constructive fraud. Reasonably equivalent consideration includes:

  • Funding a protective trust at death to provide for your spouse or children
  • Asset transfer in return for interest in an LLC or LLP; or
  • A transfer that exchanges for an annuity (or other interest) that protects the principal from claims of creditors.

Limited Liability Companies (LLCs) can be an asset protection entity, because when assets are transferred into the LLC, your creditors have limited rights to get their hands on them. Like a corporation, your interest in the LLC can be attached. However, you can place restrictions on the sale or transfer of interests that can decrease its value and define the term by which sale proceeds must be paid out. An LLC must be treated as a business for the courts to treat them as a business. Thus, if you use the LLC as if it were your personal property, courts will disregard the LLC and treat it as personal property.

Annuities are created when you exchange assets for the right to get payment over time. Unlike annuities sold by insurance companies, these annuities are private. These annuities are similar to insurance company annuities, in that they have some income tax consequences, but protect the principal against attachment.

You can also ask an experienced estate planning attorney about trusts that use annuities, which are called split interest trusts. There is a trust where you (the Grantor) give assets but keep the right to receive payments, which can be a fixed amount annually with a Grantor Retained Annuity Trust (or GRAT.)

Another trust allows you to get a variable amount, based on the value of the assets in the trust each year. This is a Grantor Retained Uni-Trust or GRUT. If the assets are vacant land or other tangible property, or being gifted to someone who’s not your sibling, parent, child, or other descendant, you can keep the income from the assets by using a Grantor Retained Income Trust (or GRIT).

Along with a trust where you make a gift to an individual, you can protect the trust assets and get a charitable deduction, if you make a gift to charity through trusts. There are two types of trust for this purpose: a Charitable Remainder Trust (CRT) lets you keep an annuity or a variable payment annually, with the remainder of the trust assets going to charity at the end of the term; and a Charitable Lead Trust (CLT) where you give a fixed of variable annuity to charity for a term and the remainder either back to you or to others.

To get the most from your asset protection, work with an experienced estate planning attorney. To learn more about asset protection and other ways to secure your planning, please visit our previous posts.

Reference: Forbes (June 25, 2020) “Three Estate Planning Techniques That Protect Your Assets From Creditors”

 

when mom refuses to get an Estate Plan

Creating a Family LLC for Estate Planning

If you want to transfer assets to your children, grandchildren or other family members but are worried about gift taxes or the weight of estate taxes your beneficiaries will owe upon your death, creating a family LLC for estate planning can help you control and protect assets during your lifetime, keep assets in the family and lessen taxes owed by you or your family members.

Investopedia’s article entitled “Using an LLC for Estate Planning” explains that a LLC is a legal entity in which its owners (called members) are protected from personal liability in case of debt, lawsuit, or other claims. This shields a member’s personal assets, like a home, automobile, personal bank account or investments.

Creating a family LLC for estate planning lets you effectively reduce the estate taxes your children would be required to pay on their inheritance. A LLC also lets you distribute that inheritance to your children during your lifetime, without as much in gift taxes. You can also have the ability to maintain control over your assets.

In a family LLC, the parents maintain management of the LLC, and the children or grandchildren hold shares in the LLC’s assets. However, they don’t have management or voting rights. This lets the parents purchase, sell, trade, or distribute the LLC’s assets, while the other members are restricted in their ability to sell their LLC shares, withdraw from the company, or transfer their membership in the company. Therefore, the parents keep control over the assets and can protect them from financial decisions made by younger members. Gifts of shares to younger members do come with gift taxes. However, there are significant tax benefits that let you give more, and lower the value of your estate.

As far as tax benefits, if you’re the manager of the LLC, and your children are non-managing members, the value of units transferred to them can be discounted quite steeply—frequently up to 40% of their market value—based on the fact that without management rights, LLC units become less marketable.

Your children can now get an advance on their inheritance, but at a lower tax burden than they otherwise would’ve had to pay on their personal income taxes. The overall value of your estate is reduced, which means that there is an eventual lower estate tax when you die. The ability to discount the value of units transferred to your children, also permits you to give them gifts of discounted LLC units. That lets you to gift beyond the current $15,000 gift limit, without having to pay a gift tax.

You can give significant gifts without gift taxes, and at the same time reduce the value of your estate and lower the eventual estate tax your heirs will face.

Speak to an experienced estate planning attorney about a family LLC, since estate planning is already complex. LLC planning can be even more complex and subject you to heightened IRS scrutiny. The regulations governing LLCs vary from state to state and evolve over time. In short, a family LLC is certainly not for everyone and it appropriately should be vetted thoroughly before creating one.

Reference: Investopedia (Oct. 25, 2019) “Using an LLC for Estate Planning”

 

Information in our blogs is very general in nature and should not be acted upon without first consulting with an attorney. Please feel free to contact The Wiewel Law Firm to schedule a complimentary consultation.
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